united states - standards for reformulated and conventional

WORLD TRADE WT/DS2/9

20 May 1996

ORGANIZATION(96-1932)

Original: English

UNITED STATES - STANDARDS FOR REFORMULATEDAND CONVENTIONAL GASOLINE

Appellate Body Report and Panel Report

Action by the Dispute Settlement Body

At its meeting on 20 May 1996, the Dispute Settlement Body adopted the attached AppellateBody report on "United States - Standards for Reformulated and Conventional Gasoline" (WT/DS2/AB/R)and the attached panel report on "United States - Standards for Reformulated and Conventional Gasoline"(WT/DS2/R) as modified by the Appellate Body report. The panel report should therefore be readin conjunction with the Appellate Body report.

Both reports have been derestricted upon their adoption by the Dispute Settlement Body.

RESTRICTED

WORLD TRADE WT/DS2/AB/R

29 April 1996


Appellate Body

United States - Standards for Reformulated

and Conventional Gasoline

AB-1996-1

Report of the Appellate Body

WT/DS2/AB/RPage 2

WORLD TRADE ORGANIZATION

APPELLATE BODY

United States - Standards for Reformulatedand Conventional Gasoline

United States, Appellant

BrazilVenezuela, Appellees

European CommunitiesNorway, Third Participants

AB-1996-1

Present:

Feliciano, Presiding MemberBeeby, MemberMatsushita, Member

I. Introductory

The United States appeals from certain conclusions on issues of law and certain legal

interpretations contained in the Panel Report, United States - Standards for Reformulated and

Conventional Gasoline, WT/DS2/R, 29 January 1996 (the "Panel Report"). That Panel had been

established to consider a dispute between the United States, on the one hand, and Venezuela, later

joined by Brazil, on the other. The dispute related to the implementation by the United States of its

domestic legislation known as the Clean Air Act of 1990 (the "CAA") and, more specifically, to the

regulation enacted by the United States' Environmental Protection Agency (the "EPA") pursuant to

that Act, to control toxic and other pollution caused by the combustion of gasoline manufactured in

or imported into the United States. This regulation is formally entitled "Regulation of Fuels and Fuel

Additives - Standards for Reformulated and Conventional Gasoline", Part 80 of Title 40 of the Code

of Federal Regulations,1 and is commonly referred to as the Gasoline Rule.

140 CFR 80, 59 Fed. Reg. 7716 (16 February 1994).

WT/DS2/AB/RPage 3

A. Procedural Matters

On 21 February 1996, the United States notified the Dispute Settlement Body of its decision

to appeal certain conclusions on issues of law and legal interpretations in the Panel Report pursuant

to Article 16 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the

"DSU")2 and simultaneously filed a Notice of Appeal with the Appellate Body, pursuant to Rule 20

of the Working Procedures for Appellate Review ( the "Working Procedures").3 Thereafter, on 4 March

1996, the United States filed its Submission as Appellant.4 Venezuela in turn filed, on 18 March 1996,

its Appellee's Submission; Brazil filed on the same day its Appellee's Submission.5 The third

participants followed, the European Communities and Norway filing Submissions, on 18 March 1996.6

The complete record of the Panel proceedings was duly transmitted to the Appellate Body.7

The oral hearing contemplated by Rule 27 of the Working Procedures was held on 27 and

28 March 1996.8 At the hearing, oral arguments were made respectively by the participants and the

third participants. Questions were put to them by the Members of the Appellate Body hearing the

appeal. Most of these questions were answered orally, and some were responded to in writing with

the responses being furnished both to the Appellate Body and the other participants and third participants.9

In addition, the participants and third participants were invited to provide, and did provide, the Appellate

Body and each other with final written statements of their respective positions.10 All the participants

and third participants responded positively and punctually, which was a source of satisfaction for the

Appellate Body.

2WT/DS2/6.

3WT/AB/WP/1, 15 February 1996.

4Pursuant to Rule 21(1) of the Working Procedures.

5Pursuant to Rule 22(1) of the Working Procedures.

6Pursuant to Rule 24 of the Working Procedures.

7Pursuant to Rule 25 of the Working Procedures.

8The oral hearing was originally scheduled for 25 March 1996 but had, for exceptional and unavoidable reasons, to bedeferred to 27 and 28 March 1996.

9Rule 28 of the Working Procedures.

10Rule 28(1) of the Working Procedures.

WT/DS2/AB/RPage 4

B. The Clean Air Act and its Implementation

The CAA and its implementation by the Gasoline Rule, are described fully at paragraphs 2.1-

2.13 of the Panel Report. However, it may be convenient to recall a number of the Panel's factual

findings at this stage.

The CAA established twogasoline programs11 to ensure that pollution from gasoline combustion

does not exceed 1990 levels and that pollutants in major population centres are reduced. The first

program concerns ozone "nonattainment areas", consisting of (i) nine large metropolitan areas that

have experienced the worst summertime ozone pollution and (ii) various additional areas included at

the request of the state governors concerned. All gasoline sold to consumers in these nonattainment

areas must be "reformulated." The sale of conventional gasoline in nonattainment areas is prohibited.

The second program concerns "conventional" gasoline, which may be sold to consumers in the rest

of the United States. The implementation of both programs, which apply to gasoline sold by domestic

refiners, blenders and importers, was entrusted to the EPA. As a result, the EPA adopted the Gasoline

Rule, which relies heavily on the use of 1990 baselines as a means of determining compliance with

the CAA requirements.

1. The Reformulated Gasoline Program

The CAA established certain compositional and performance specifications for reformulated

gasoline.12 Thus, the oxygen content must not be less than 2.0 per cent by weight, the benzene content

must not exceed 1.0 per cent by volume and the gasoline must be free of heavy metals, including lead

or manganese. The performance specifications of the CAA require a 15 per cent reduction in the

emissions of both volatile organic compounds ("VOCs") and toxic air pollutants ("toxics"), and no

increase in emissions of nitrogen oxides ("NOx"). Section 80.41 of the Gasoline Rule sets out two

methods by which entities can certify their gasoline as meeting these requirements. From 1 January

1995 to 1 January 1998, domestic refiners, blenders and importers may use an interim method of

certification called the "Simple Model", which requires compliance with fixed specifications concerning

Reid Vapour Pressure, oxygen, benzene and toxics performance. In addition, compliance is required

with certain "non-degradation requirements" by maintaining sulphur, olefins and T-90 qualities at or

below 1990 baseline levels, on an average annual basis. As of 1 January 1998, these entities must

11Section 211(k).

12Section 211(k)(2)-(3).

WT/DS2/AB/RPage 5

comply with the "Complex Model", which more accurately predicts emissions performance. The

Complex Model is not in issue in the present dispute.

2. The Conventional Gasoline Program

In order to prevent the "dumping" of pollutants extracted from reformulated gasoline into

conventional gasoline, the CAA requires that conventional gasoline sold by domestic refiners, blenders

and importers in the United States remains as clean as 1990 baseline levels.13 Unlike the Simple Model

for reformulated gasoline, the "non-degradation" from 1990 baseline requirements for conventional

gasoline applies in respect of all conventional gasoline qualities, and not only sulphur, olefins and T-90.

Compliance is measured by comparing emissions from the conventional gasoline sold by domestic

refiners, blenders and importers against emissions from a 1990 baseline and is assessed on an annual

average basis.14

3. Baseline Establishment Rules

In respect of both reformulated gasoline (for sulphur, olefins and T-90 requirements under

the Simple Model) and conventional gasoline (for all requirements), 1990 baselines are an integral

element of the Gasoline Rule enforcement process. Accordingly, the Gasoline Rule contains detailed

baseline establishment rules.15 Baselines can be either individual (established by the entity itself) or

statutory (established by the EPA and intended to reflect average 1990 United States gasoline quality),

depending on the nature of the entity concerned.

(i) domestic refiners

Any domestic refiner which was in operation for at least six months in 1990 must establish

an individual baseline representing the quality of gasoline produced by that refiner in 1990. The Gasoline

Rule provides three methods of establishment to be used for this purpose. Under Method 1, the domestic

refiner must use the quality data and volume records of its 1990 gasoline. If Method 1 data is not

available, the domestic refiner must use its 1990 gasoline blendstock quality data and 1990 blendstock

production records (Method 2). In the event that Method 2 data is not available, the domestic refiner

must establish an individual 1990 baseline on the basis of its post-1990 gasoline blendstock and/or

13Section 211(k)(8) of the CAA.

14Section 80.90 of the Gasoline Rule.

15Section 80.91.

WT/DS2/AB/RPage 6

gasoline quality data modeled in the light of refinery changes to show 1990 gasoline composition

(Method 3).

Domestic refiners that were in operation for at least six months in 1990 are not permitted to

forego their individual baseline and use the statutory baseline established by the EPA. However,

domestic refiners that commenced operations after 1990, or operated for less than six months during

1990, are required to use the statutory baseline established by the EPA.

(ii) blenders

Blenders are required to establish an individual baseline representing the quality of their 1990

gasoline using Method 1 above. Failing this, they must use the statutory baseline established by the

EPA. Blenders may not apply an individual baseline using Methods 2 or 3.

(iii) importers

Importers of foreign gasoline are required to establish an individual baseline in respect of gasoline

imported by them during 1990, using Method 1. Like blenders, importers become subject to the statutory

baseline if, as anticipated by the EPA, the data necessary for Method 1 is unavailable.

The Gasoline Rule does not provide for foreign refiner individual baselines, although the possible

use of individual baselines for foreign refiners was examined by the EPA while drafting the Gasoline

Rule. Indeed, the EPA continued to examine the possible use of individual baselines for foreign refineries

after the adoption of the Gasoline Rule, and prepared its May 1994 proposal16 as a result. The May

1994 proposal provided for limited use by importers of individual baselines established for foreign

refineries in order to demonstrate that gasoline produced at that foreign refinery complied with the

reformulated (but not conventional) gasoline standards. The individual baselines would be determined

using Methods 1, 2 or 3, as for domestic refineries under the Gasoline Rule. However, the use of

individual baselines in such cases would be conditioned and limited in a number of ways. The EPA's

May 1994 proposal never entered into force, as the United States Congress enacted legislation in

September 1994 denying the funding necessary for its implementation.

1640 CFR 80, 59 Fed. Reg. at 22 800 (3 May 1994).

WT/DS2/AB/RPage 7

C. The Panel Report: Its Findings and Conclusions

The Panel's overall conclusions and its recommendation are set out in the following terms:

8.1 In the light of the findings above, the Panel concluded that the baselineestablishment methods contained in Part 80 of Title 40 of the Code of FederalRegulations are not consistent with Article III:4 of the General Agreement,and cannot be justified under paragraphs (b), (d) and (g) of Article XX of theGeneral Agreement.

8.2 The Panel recommends that the Dispute Settlement Body request theUnited States to bring this part of the Gasoline Rule into conformity with itsobligations under the General Agreement.17

On route to its overall conclusions, the Panel made the following principal findings:

(i) that the Panel's terms of reference were established after the 75 per cent rule had ceased

to have any effect, and the rule had not been mentioned in the terms of reference, and

that, in any case, it was unnecessary, in view of findings (ii), (iv), (v) and (vii) below,

to determine whether the measure at issue was inconsistent with Article I:1 of the

General Agreement on Tariffs and Trade 1994 (the "General Agreement");18

(ii) that imported and domestic gasoline were "like products" and that since, under the

baseline establishment rules of the Gasoline Rule, imported gasoline was effectively

prevented from benefitting from as favourable sales conditions as were afforded domestic

gasoline by an individual baseline tied to the producer of a product, imported gasoline

was treated "less favourably" than domestic gasoline. The baseline establishment rules

of the Gasoline Rule were accordingly inconsistent with Article III:4 of the General

Agreement;19

(iii) that, in view of finding (ii), it was not necessary to examine the consistency of the

Gasoline Rule with Article III:1;20

17Panel Report at p. 47.

18Panel Report, para. 6.19.



WT/DS2/AB/RPage 8

(iv) that the "aspect of the baseline establishment methods" found inconsistent with

Article III:4 was not justified under Article XX(b) of the General Agreement as

"necessary to protect human, animal or plant life or health";21

(v) that the "maintenance of discrimination between imported and domestic gasoline"

contrary to Article III:4 was not justified under Article XX(d) as "necessary to secure

compliance with laws or regulations which are not inconsistent with the provisions

of [the General] Agreement";22

(vi) that clean air was an exhaustible natural resource within the meaning of Article XX(g)

of the General Agreement;23

(vii) that the baseline establishment rules found to be inconsistent with Article III:4 could

not be justified under Article XX(g) as a measure "relating to" the conservation of

exhaustible natural resources;24

(viii) that it was unnecessary, in the light of finding (vii), to determine whether the measure

at issue was "made effective in conjunction with restrictions on domestic production

or consumption";25

(ix) that it was unnecessary, in the light of finding (vii), to determine whether the measure

at issue met the conditions in the introductory clause of Article XX (sometimes referred

to as the chapeau of Article XX);

(x) that it was unnecessary, in view of findings (ii), (iv), (v) and (vii), to determine whether

the measure at issue was inconsistent with Article XXIII:1(b) as having nullified and

impaired benefits accruing under the General Agreement;26 and







WT/DS2/AB/RPage 9

(xi) that it was unnecessary, in the light of findings (ii), (iv), (v) and (vii), to determine

whether the measure at issue was inconsistent with Articles 2.1 and 2.2 of the Agreement

on Technical Barriers to Trade (the "TBT Agreement").27

II. Issues Raised In This Appeal

A. The Claims of Error by the United States

It is important to focus upon the subject matter of this appeal. We seek to do this first by

identifying the issues which have been raised by the Appellant, the United States. In what follows

we highlight those same issues by listing certain other issues dealt with in the Panel proceedings but

which have not been brought before the Appellate Body in this appeal, and which we accordingly exclude

from consideration in this Appellate Report.

In its Notice of Appeal, dated 21 February 1996, and its Appellant's Submission, dated 4 March

1996, the United States claims that the Panel erred in law, firstly, in holding that the baseline

establishment rules of the Gasoline Rule are not justified under Article XX(g) of the General Agreement

and, secondly, in its interpretation of Article XX as a whole.

More specifically, the United States assigns as error the ruling of the Panel that the baseline

establishment rules do not constitute a "measure" "relating to" the conservation of clean air within

the meaning of Article XX(g) of the General Agreement. Consequently, it is also the view of the United

States that the Panel erred in failing to proceed further in its interpretation and application of

Article XX(g), and in not finding that the baseline establishment rules satisfy the other requirements

of Article XX(g) and the introductory provisions of Article XX.

The sharply limited scope of this appeal is underscored by noting the number of findings which

the Panel had made but which have not been appealed from by the United States. Very briefly, the

United States does not appeal from the findings or rulings made by the Panel on, or in respect of, the

consistency of the baseline establishment rules with Article I:1, Article III:1, Article III:4, and

Article XXIII:1(b) of the General Agreement and the applicability of Article XX(b) and Article XX(d)

of the General Agreement and of the TBT Agreement. Understandably, the United States has also not


WT/DS2/AB/RPage 10

appealed from the Panel's ruling that clean air is an exhaustible natural resource within the meaning

of Article XX(g) of the General Agreement.

B. The Claims of the Appellees and the Arguments of the Third Participants

The Appellees, Venezuela and Brazil, submit that the Appellate Body should dismiss the United

States' appeal and uphold the Panel's findings and conclusions concerning Article XX(g). In particular,

Venezuela and Brazil support the Panel's finding that the measure at issue before the Panel was not

one "relating to" the conservation of exhaustible natural resources. Venezuela also states that a measure

can only be "relating to" or "primarily aimed at" conservation if the measure was both: (i) primarily

intended to achieve a conservation goal; and (ii) had a positive conservation effect.

Venezuela argues that, as the United States has not met its burden with respect to the "relating

to" requirement of Article XX(g) in this appeal, the Appellate Body may uphold the Panel Report on

this issue alone, and it is not necessary to address the additional requirements of Article XX(g), nor

the requirements in the Article XX chapeau.

If the Appellate Body overturns the Panel's findings on the "relating to" component of

Article XX(g) and does proceed to examine the other requirements of Article XX(g), Venezuela and

Brazil submit that the United States has also failed to demonstrate that those requirements have been

satisfied. They argue that the measure in issue is not "made effective in conjunction with restrictions

on domestic production or consumption" as the restrictions are not imposed as direct limits on the

production or consumption of clean air, but rather upon the consumption of certain kinds of gasoline.

They further submit that clean air does not qualify as an "exhaustible natural resource" within the

meaning of Article XX(g).

With regard to the requirements in the chapeau to Article XX, Venezuela and Brazil submit

that the measure is applied in a manner which constitutes "arbitrary or unjustifiable discrimination

between countries where the same conditions prevail." Venezuela argues that the measure constitutes

a "disguised restriction on international trade" as well.

The Appellees also raise the conditional argument that, if the Appellate Body were to overturn

the Panel's findings on Article XX(g), and not find in favour of Venezuela and Brazil as to the other

requirements of Article XX, it would then need to examine their claims under the TBT Agreement.

WT/DS2/AB/RPage 11

The third participants, the European Communities and Norway, endorse the Panel' s interpretation

of "relating to" and the Panel's findings under Article XX(g). They find it difficult to accept the United

States' arguments that the measure at issue was "made effective in conjunction with restrictions on

domestic production or consumption," as the measure in issue did not impose restrictions on clean

air. With regard to the Article XX chapeau criteria, the European Communities and Norway both

submit that the measure is applied in a manner constituting "arbitrary or unjustifiable discrimination

between countries where the same conditions prevail" and a "disguised restriction on international trade."

C. The Preliminary Question

A preliminary question was raised by the United States at the oral hearing concerning arguments

made by Venezuela and Brazil in their respective Appellees' Submissions on the issues of whether

clean air is an exhaustible natural resource within the meaning of Article XX(g) and whether the baseline

establishment rules are consistent with the TBT Agreement. The gist of the preliminary question is

that the above issues and the related arguments made by Venezuela and Brazil were not properly brought

before the Appellate Body in this appeal in accordance with the Working Procedures. It was underscored

by the United States that Venezuela and Brazil had not appealed from the ruling of the Panel on the

clean air issue or from the non-ruling of the Panel on the applicability of the TBT Agreement. Venezuela

and Brazil had not filed Appellants' Submissions under Rule 23(1) of the Working Procedures. Neither

had Venezuela nor Brazil filed separate appeals under Rule 23(4) of the Working Procedures. Their

arguments on these two matters had been made in their Appellees' Submissions pursuant to Rule 22

and, as Appellees, Venezuela and Brazil could not challenge the Panel's finding on the clean air issue

and its non-finding on the TBT Agreement's applicability.

At the oral hearing, in response to questions posed by the Appellate Body, Venezuela and Brazil

confirmed that they, indeed, were not appealing the mentioned two matters. They went on, however,

to state that they believed it would be within the scope of authority of the Appellate Body, if it found

it necessary to do so, to address the results of the Panel's examination of those two issues.

In its Post-Hearing Memorandum, the United States asserted, among other things, that were

the Appellate Body to take up the above two matters in the present appeal, unfairness would be generated

vis-à-vis the United States and it would encourage a disregard of the Working Procedures. Such disregard

by the Appellate Body would, it was further stated, create difficulties for third parties who would have

to make up their minds to become third participants or not on the basis of the issues raised on appeal

as set out in the Notice of Appeal and the Appellant's Submission. The United States itself had not

WT/DS2/AB/RPage 12

raised the clean air issue and the applicability of the TBT Agreement in its appeal, and the United States

was the only Appellant in AB-1996-1.

We find the United States' submissions on this preliminary question persuasive. The arguments

raised by Venezuela and Brazil on the clean air and TBT issues may be seen to be, in effect, conditional

appeals, that is, conditional on the Appellate Body's overturning the Panel's overall findings on

Article XX(g) and not finding in favour of Venezuela and Brazil as to the other requirements of

Article XX. This condition is not fulfilled. Even if this condition had been fulfilled, the Appellate

Body would have been most reluctant to pass upon these two issues. We observe, in the first place,

that the issues in fact raised by the Appellant, the United States, are not of the kind which cannot be

decided without at the same time necessarily resolving the clean air issue or the applicability of the

TBT Agreement. In the second place, to deal with those two issues, under the circumstances of this

appeal, would have required the Appellate Body casually to disregard its own Working Procedures

and to do so in the absence of a compelling reason grounded on, for instance, fundamental fairness

or force majeure. Venezuela and Brazil could have appealed the Panel's finding and non-finding on

the two matters by taking advantage of Rules 23(1) or 23(4) of the Working Procedures and thereby

placing the Appellate Body in a position to dispose of those issues directly in one and the same appellate

proceeding.

The acceptance by Venezuela and Brazil of the Working Procedures, and their commitment

to them, is not in question. We have no option, however, but to find that the route they chose for

addressing the two issues in question is not contemplated by the Working Procedures, and therefore,

these issues are not properly the subject of this appeal.

WT/DS2/AB/RPage 13

III. The Issue of Justification Under Article XX(g) of the General Agreement

Article XX(g) needs to be set out in full:

Article XX

General Exceptions

Subject to the requirement that such measures are not applied in amanner which would constitute a means of arbitrary or unjustifiablediscrimination between countries where the same conditions prevail, or adisguised restriction on international trade, nothing in this Agreement shallbe construed to prevent the adoption or enforcement by any contracting partyof measures:

. . .

(g) relating to the conservation of exhaustible natural resourcesif such measures are made effective in conjunction withrestrictions on domestic production or consumption;

. . .

A. "Measures"

The initial issue we are asked to look at relates to the proper meaning of the term "measures"

as used both in the chapeau of Article XX and in Article XX(g). The question is whether "measures"

refers to the entire Gasoline Rule or, alternatively, only to the particular provisions of the Gasoline

Rule which deal with the establishment of baselines for domestic refiners, blenders and importers.

Cast in the foregoing terms, the issue does not appear to be a live one. True enough the Panel

Report used differing terms, or terms of shifting reference, in designating the "measures" in different

parts of the Report. The Panel Report, however, held only the baseline establishment rules of the

Gasoline Rule to be inconsistent with Article III:4, to the extent that such rules provided "less favourable

treatment" for imported than for domestic gasoline. These are the same provisions which the Panel

evaluated, and found wanting, under the justifying provisions of Article XX(g). The Panel Report

did not purport to find the Gasoline Rule itself as a whole, or any part thereof other than the baseline

establishment rules, to be inconsistent with Article III:4; accordingly, there was no need at all to examine

whether the whole of the Gasoline Rule or any of its other rules, was saved or justified by Article XX(g).

The Panel here was following the practice of earlier panels in applying Article XX to provisions found

to be inconsistent with Article III:4: the "measures" to be analyzed under Article XX are the same

WT/DS2/AB/RPage 14

provisions infringing Article III:4.28 These earlier panels had not interpreted "measures" more broadly

under Article XX to include provisions not themselves found inconsistent with Article III:4. In the

present appeal, no one has suggested in their final submissions that the Appellate Body should examine

under Article XX any portion of the Gasoline Rule other than the baseline establishment rules held

to be in conflict with Article III:4. No one has urged an interpretation of "measures" which would

encompass the Gasoline Rule in its totality.29

At the oral hearing and in its Post-Hearing Memorandum, the United States complained about

the designation of the baseline establishment rules in the Panel Report and by the Appellees Venezuela

and Brazil, in such terms as "the difference in treatment", "the less favourable treatment" or "the

discrimination." It is, of course, true that the baseline establishment rules had been found by the Panel

to be inconsistent with Article III:4 of the General Agreement. The frequent designation of those

provisions by the Panel in terms of its legal conclusion in respect of Article III:4, in the Appellate

Body's view, did not serve the cause of clarity in analysis when it came to evaluating the same baseline

establishment rules under Article XX(g).

B. "relating to the conservation of exhaustible natural resources"

The Panel Report took the view that clean air was a "natural resource" that could be "depleted."

Accordingly, as already noted earlier, the Panel concluded that a policy to reduce the depletion of clean

air was a policy to conserve an exhaustible natural resource within the meaning of Article XX(g).

Shortly thereafter, however, the Panel Report also concluded that "the less favourable baseline

establishments methods" were not primarily aimed at the conservation of exhaustible natural resources

and thus fell outside the justifying scope of Article XX(g).

28Canada - Administration of theForeignInvestment Review Act, BISD 30S/140, adopted 7 February 1984; UnitedStates -Section 337 of the Tariff Act of 1930, BISD 36S/345, adopted 7 November 1989; United States - Taxes on Automobiles,

DS31/R (1994), unadopted.

29Although, in earlier submissions to the Appellate Body, the United States suggested that "the Gasoline Rule" should

be examined in the context of Article XX(g), in its Post-Hearing Memorandum, dated 1 April 1996, the United States confirmed

its understanding that the "measures" in issue are the baseline establishment rules contained in the Gasoline Rule.

Brazil stated, in its final submission to the Appellate Body, dated 1 April 1996, that "the ‘measure’ with which this appeal

is concerned is the baseline methodology of the Gasoline Rule, not the entire rule itself." This would suggest a position

similar to that adopted by the United States. Thereafter, Brazil continued to state that "Brazil and Venezuela did not challengeall portions of the Rule; they challenged only the discriminatory methods of establishing baselines."

Venezuela stated, in its summary statement, dated 29 March 1996, that "the measure to be examined is the discriminatory

measure, that is, the aspect of the Gasoline Rule that denies imported gasoline the right to use the same regulatory systemof baselines applicable to U.S. gasoline, namely, the system of individual baselines."

WT/DS2/AB/RPage 15

The Panel, addressing the task of interpreting the words "relating to", quoted with approval

the following passage from the panel report in the 1987 Herring and Salmon case:30

as the preamble of Article XX indicates, the purpose of including Article XX:(g) inthe General Agreement was not to widen the scope for measures serving trade policypurposes but merely to ensure that the commitments under the General Agreementdo not hinder the pursuit of policies aimed at the conservation of exhaustive naturalresources. The Panel concluded for these reasons that, while a trade measure did nothave to be necessary or essential to the conservation of an exhaustible natural resource,it had to be primarily aimed at the conservation of an exhaustible natural resource tobe considered as "relating to" conservation within the meaning of Article XX:(g).(emphasis added by the Panel)

The Panel Report then went on to apply the 1987 Herring and Salmon reasoning and conclusion

to the baseline establishment rules of the Gasoline Rule in the following manner:31

The Panel then considered whether the precise aspects of the Gasoline Rule that it hadfound to violate Article III -- the less favourable baseline establishments methods thatadversely affected the conditions of competition for imported gasoline -- were primarilyaimed at the conservation of natural resources. The Panel saw no direct connectionbetween less favourable treatment of imported gasoline that was chemically identicalto domestic gasoline, and the US objective of improving air quality in the United States.Indeed, in the view of the Panel, being consistent with the obligation to provide noless favourable treatment would not prevent the attainment of the desired level ofconservation of natural resources under the Gasoline Rule. Accordingly, it could notbe said that the baseline establishment methods that afforded less favourable treatmentto imported gasoline were primarily aimed at the conservation of natural resources.In the Panel's view, the above-noted lack of connection was underscored by the factthat affording treatment of imported gasoline consistentwith its Article III:4 obligationswould not in any way hinder the United States in its pursuit of its conservation policiesunder the Gasoline Rule. Indeed, the United States remained free to regulate in orderto obtain whatever air quality it wished. The Panel therefore concluded that the lessfavourable baseline establishments methods at issue in this case were not primarilyaimed at the conservation of natural resources.

It is not easy to follow the reasoning in the above paragraph of the Panel Report. In our view,

there is a certain amount of opaqueness in that reasoning. The Panel starts with positing that there

was "no direct connection" between the baseline establishment rules which it characterized as "less

favourable treatment" of imported gasoline that was chemically identical to the domestic gasoline and

"the US objective of improving air quality in the United States." Shortly thereafter, the Panel went

on to conclude that "accordingly, it could not be said that the baseline establishment rules that afforded

30Canada - Measures Affecting Exports of Unprocessed Herring and Salmon, BISD 35S/98, para. 4.6; adopted on 22 March

1988, cited in Panel Report, para. 6.39.


WT/DS2/AB/RPage 16

less favourable treatment to imported gasoline were primarily aimed at the conservation of natural

resources" (emphasis added). The Panel did not try to clarify whether the phrase "direct connection"

was being used as a synonym for "primarily aimed at" or whether a new and additional element (on

top of "primarily aimed at") was being demanded.

One problem with the reasoning in that paragraph is that the Panel asked itself whether the

"less favourable treatment" of imported gasoline was "primarily aimed at" the conservation of natural

resources, rather than whether the "measure", i.e. the baseline establishment rules, were "primarily

aimed at" conservation of clean air. In our view, the Panel here was in error in referring to its legal

conclusion on Article III:4 instead of the measure in issue. The result of this analysis is to turn

Article XX on its head. Obviously, there had to be a finding that the measure provided "less favourable

treatment" under Article III:4 before the Panel examined the "General Exceptions" contained in

Article XX. That, however, is a conclusion of law. The chapeau of Article XX makes it clear that

it is the "measures" which are to be examined under Article XX(g), and not the legal finding of "less

favourable treatment."

Furthermore, the Panel Report appears to have utilized a conclusion it had reached earlier in

holding that the baseline establishment rules did not fall within the justifying terms of Articles XX(b);

i.e. that the baseline establishment rules were not "necessary" for the protection of human, animal

or plant life. The Panel Report, it will be recalled, found that the baseline establishment rules had

not been shown by the United States to be "necessary" under Article XX(b) since alternative measures

either consistent or less inconsistent with the General Agreement were reasonably available to the United

States for achieving its aim of protecting human, animal or plant life.32 In other words, the Panel Report

appears to have applied the "necessary" test not only in examining the baseline establishment rules

under Article XX(b), but also in the course of applying Article XX(g).

A principal difficulty, in the view of the Appellate Body, with the Panel Report's application

of Article XX(g) to the baseline establishment rules is that the Panel there overlooked a fundamental

rule of treaty interpretation. This rule has received its most authoritative and succinct expression in

the Vienna Convention on the Law of Treaties (the "Vienna Convention")33 which provides in relevant

part:

32Panel Report, paras. 6.25-6.28.

33(1969), 8 International Legal Materials 679.

WT/DS2/AB/RPage 17

ARTICLE 31

General rule of interpretation

1. A treaty shall be interpreted in good faith in accordance withthe ordinary meaning to be given to the terms of the treaty in theircontext and in the light of its object and purpose.

The "general rule of interpretation" set out above has been relied upon by all of the participants

and third participants, although not always in relation to the same issue. That general rule of

interpretation has attained the status of a rule of customary or general international law.34 As such,

it forms part of the "customary rules of interpretation of public international law" which the Appellate

Body has been directed, by Article 3(2) of the DSU, to apply in seeking to clarify the provisions of

the General Agreement and the other "covered agreements" of the Marrakesh Agreement Establishing

the World Trade Organization35 (the "WTO Agreement"). That direction reflects a measure of recognition

that the General Agreement is not to be read in clinical isolation from public international law.

Applying the basic principle of interpretation that the words of a treaty, like the General

Agreement, are to be given their ordinary meaning, in their context and in the light of the treaty's object

and purpose, the Appellate Body observes that the Panel Report failed to take adequate account of the

words actually used by Article XX in its several paragraphs. In enumerating the various categories

of governmental acts, laws or regulations which WTO Members may carry out or promulgate in pursuit

of differing legitimate state policies or interests outside the realm of trade liberalization, Article XX

uses different terms in respect of different categories:

"necessary" - in paragraphs (a), (b) and (d); "essential" - in paragraph (j);

"relating to" - in paragraphs (c), (e) and (g); "for the protection of" - in paragraph (f);

"in pursuance of" - in paragraph (h); and "involving" - in paragraph (i).

34See, e.g., Territorial Dispute Case (Libyan Arab Jamahiriya v. Chad), (1994), I.C.J. Reports p. 6 (International Court

of Justice); Golder v. United Kingdom, ECHR, Series A, (1995) no. 18 (European Court of Human Rights); Restrictions

to the Death Penalty Cases, (1986) 70 International Law Reports 449 (Inter-American Court of Human Rights); Jiménezde Aréchaga, "International Law in the Past Third of a Century" (1978-I) 159 Recueil des Cours 1, p. 42; D. Carreau,

Droit International (3è ed., 1991) p. 140; Oppenheim's International Law (9th ed., Jennings and Watts, eds. 1992) Vol. 1,

pp. 1271-1275.

35Done at Marrakesh, Morocco, 15 April 1994.

WT/DS2/AB/RPage 18

It does not seem reasonable to suppose that the WTO Members intended to require, in respect

of each and every category, the same kind or degree of connection or relationship between the measure

under appraisal and the state interest or policy sought to be promoted or realized.

At the same time, Article XX(g) and its phrase, "relating to the conservation of exhaustible

natural resources," need to be read in context and in such a manner as to give effect to the purposes

and objects of the General Agreement. The context of Article XX(g) includes the provisions of the

rest of the General Agreement, including in particular Articles I, III and XI; conversely, the context

of Articles I and III and XI includes Article XX. Accordingly, the phrase "relating to the conservation

of exhaustible natural resources" may not be read so expansively as seriously to subvert the purpose

and object of Article III:4. Nor may Article III:4 be given so broad a reach as effectively to emasculate

Article XX(g) and the policies and interests it embodies. The relationship between the affirmative

commitments set out in, e.g., Articles I, III and XI, and the policies and interests embodied in the

"General Exceptions" listed in Article XX, can be given meaning within the framework of the General

Agreement and its object and purpose by a treaty interpreter only on a case-to-case basis, by careful

scrutiny of the factual and legal context in a given dispute, without disregarding the words actually

used by the WTO Members themselves to express their intent and purpose.

The 1987 Herring and Salmon report, and the Panel Report itself, gave some recognition to

the foregoing considerations of principle. As earlier noted, the Panel Report quoted the following

excerpt from the Herring and Salmon report:

as the preamble of Article XX indicates, the purpose of including Article XX(g) inthe General Agreement was not to widen the scope for measures serving trade policypurposes but merely to ensure that the commitments under the General Agreement donot hinder the pursuit of policies aimed at the conservation of exhaustible naturalresources.36 (emphasis added)

All the participants and the third participants in this appeal accept the propriety and applicability

of the view of the Herring and Salmon report and the Panel Report that a measure must be "primarily

aimed at" the conservation of exhaustible natural resources in order to fall within the scope of

Article XX(g).37 Accordingly, we see no need to examine this point further, save, perhaps, to note

36Canada - Measures Affecting Exports of Unprocessed Herring and Salmon, BISD 35S/98, para. 4.6; adopted 22 March

1988, cited in Panel Report, para. 6.39.

37We note that the same interpretation has been applied in two recent unadopted panel reports: United States - Restrictionson Imports of Tuna, DS29/R (1994); United States - Taxes on Automobiles, DS31/R (1994).

WT/DS2/AB/RPage 19

that the phrase "primarily aimed at" is not itself treaty language and was not designed as a simple litmus

test for inclusion or exclusion from Article XX(g).

Against this background, we turn to the specific question of whether the baseline establishment

rules are appropriately regarded as "primarily aimed at" the conservation of natural resources for the

purposes of Article XX(g). We consider that this question must be answered in the affirmative.

The baseline establishment rules, taken as a whole (that is, the provisions relating to establishment

of baselines for domestic refiners, along with the provisions relating to baselines for blenders and

importers of gasoline), need to be related to the "non-degradation" requirements set out elsewhere in

the Gasoline Rule. Those provisions can scarcely be understood if scrutinized strictly by themselves,

totally divorced from other sections of the Gasoline Rule which certainly constitute part of the context

of these provisions. The baseline establishment rules whether individual or statutory, were designed

to permit scrutiny and monitoring of the level of compliance of refiners, importers and blenders with

the "non-degradation" requirements. Without baselines of some kind, such scrutiny would not be possible

and the Gasoline Rule's objective of stabilizing and preventing further deterioration of the level of

air pollution prevailing in 1990, would be substantially frustrated. The relationship between the baseline

establishment rules and the "non-degradation" requirements of the Gasoline Rule is not negated by

the inconsistency, found by the Panel, of the baseline establishment rules with the terms of Article III:4.

We consider that, given that substantial relationship, the baseline establishment rules cannot be regarded

as merely incidentally or inadvertently aimed at the conservation of clean air in the United States for

the purposes of Article XX(g).

C. "if such measures are made effective in conjunction with restrictions on domestic

production or consumption"

The Panel did not find it necessary to deal with the issue of whether the baseline establishment

rules "are made effective in conjunction with restrictions on domestic production or consumption",

since it had earlier concluded that those rules had not even satisfied the preceding requirement of

"relating to" in the sense of being "primarily aimed at" the conservation of clean air. Having been

unable to concur with that earlier conclusion of the Panel, we must now address this second requirement

of Article XX(g), the United States having, in effect, appealed from the failure of the Panel to proceed

further with its inquiry into the availability of Article XX(g) as a justification for the baseline

establishment rules.

WT/DS2/AB/RPage 20

The claim of the United States is that the second clause of Article XX(g) requires that the burdens

entailed by regulating the level of pollutants in the air emitted in the course of combustion of gasoline,

must not be imposed solely on, or in respect of, imported gasoline.

On the other hand, Venezuela and Brazil refer to prior panel reports which include statements

to the effect that to be deemed as "made effective in conjunction with restrictions on domestic production

or consumption", a measure must be "primarily aimed at" making effective certain restrictions on

domestic production or consumption.38 Venezuela and Brazil also argue that the United States has

failed to show the existence of restrictions on domestic production or consumption of a natural resource

under the Gasoline Rule since clean air was not an exhaustible natural resource within the meaning

of Article XX(g). Venezuela contends, finally, that the United States has not discharged its burden

of showing that the baseline establishment rules make the United States' regulatory scheme "effective."

The claim of Venezuela is, in effect, that to be properly regarded as "primarily aimed at" the conservation

of natural resources, the baseline establishment rules must not only "reflect a conservation purpose"

but also be shown to have had "some positive conservation effect."39

The Appellate Body considers that the basic international law rule of treaty interpretation,

discussed earlier, that the terms of a treaty are to be given their ordinary meaning, in context, so as

to effectuate its object and purpose, is applicable here, too. Viewed in this light, the ordinary or natural

meaning of "made effective" when used in connection with a measure - a governmental act or regulation -

may be seen to refer to such measure being "operative", as "in force", or as having "come into effect."40

Similarly, the phrase "in conjunction with" may be read quite plainly as "together with" or "jointly

with."41 Taken together, the second clause of Article XX(g) appears to us to refer to governmental

measures like the baseline establishment rules being promulgated or brought into effect together with

restrictions on domestic production or consumption of natural resources. Put in a slightly different

manner, we believe that the clause "if such measures are made effective in conjunction with restrictions

on domestic product or consumption" is appropriately read as a requirement that the measures concerned

impose restrictions, not just in respect of imported gasoline but also with respect to domestic gasoline.

38Canada - Measures Affecting Exports of Unprocessed Herring and Salmon, BISD 35S/98, paras. 4.6-4.7; adopted

22 March 1988. Also, United States - Restrictions on Imports of Tuna, DS29/R (1994), unadopted; and United States -Taxes on Automobiles, DS31/R (1994), unadopted.

39Venezuela's Appellee's Submission, dated 18 March 1996; Venezuela's Statement at the Oral Hearing, dated27 March 1996.

40The New Shorter Oxford English Dictionary on Historical Principles (L. Brown, ed., 1993), Vol. I, p. 786.

41Id., p. 481.

WT/DS2/AB/RPage 21

The clause is a requirement of even-handedness in the imposition of restrictions, in the name of

conservation, upon the production or consumption of exhaustible natural resources.

There is, of course, no textual basis for requiring identical treatment of domestic and imported

products. Indeed, where there is identity of treatment - constituting real, not merely formal, equality

of treatment - it is difficult to see how inconsistency with Article III:4 would have arisen in the first

place. On the other hand, if no restrictions on domestically-produced like products are imposed at

all, and all limitations are placed upon imported products alone, the measure cannot be accepted as

primarily or even substantially designed for implementing conservationist goals.42 The measure would

simply be naked discrimination for protecting locally-produced goods.

In the present appeal, the baseline establishment rules affect both domestic gasoline and imported

gasoline, providing for - generally speaking - individual baselines for domestic refiners and blenders

and statutory baselines for importers. Thus, restrictions on the consumption or depletion of clean air

by regulating the domestic production of "dirty" gasoline are established jointly with corresponding

restrictions with respect to imported gasoline. That imported gasoline has been determined to have

been accorded "less favourable treatment" than the domestic gasoline in terms of Article III:4, is not

material for purposes of analysis under Article XX(g). It might also be noted that the second clause

of Article XX(g) speaks disjunctively of "domestic production or consumption."

We do not believe, finally, that the clause "if made effective in conjunction with restrictions

on domestic production or consumption" was intended to establish an empirical "effects test" for the

availability of the Article XX(g) exception. In the first place, the problem of determining causation,

well-known in both domestic and international law, is always a difficult one. In the second place,

in the field of conservation of exhaustible natural resources, a substantial period of time, perhaps years,

may have to elapse before the effects attributable to implementation of a given measure may be

observable. The legal characterization of such a measure is not reasonably made contingent upon

occurrence of subsequent events. We are not, however, suggesting that consideration of the predictable

effects of a measure is never relevant. In a particular case, should it become clear that realistically,

42Some illustration is offered in the Herring and Salmon case which involved, inter alia, a Canadian prohibition of exportsof unprocessed herring and salmon. This prohibition effectively constituted a ban on purchase of certain unprocessed fish

by foreign processors and consumers while imposing no corresponding ban on purchase of unprocessed fish by domestic

processors and consumers. The prohibitions appeared to be designed to protect domestic processors by giving them exclusive

access to fresh fish and at the same time denying such raw material to foreign processors. The Panel concluded that theseexport prohibitions were not justified by Article XX(g). BISD 35S/98, para. 5.1, adopted 22 March 1988. See also the

Panel Report in the United States - Prohibition of Imports of Tuna and TunaProducts from Canada, BISD 29S/91, paras. 4.10-4.12; adopted on 22 February 1982.

WT/DS2/AB/RPage 22

a specific measure cannot in any possible situation have any positive effect on conservation goals, it

would very probably be because that measure was not designed as a conservation regulation to begin

with. In other words, it would not have been "primarily aimed at" conservation of natural resources

at all.

IV. The Introductory Provisions of Article XX of the General Agreement: Applying theChapeau of the General Exceptions

Having concluded, in the preceding section, that the baseline establishment rules of the Gasoline

Rule fall within the terms of Article XX(g), we come to the question of whether those rules also meet

the requirements of the chapeau of Article XX. In order that the justifying protection of Article XX

may be extended to it, the measure at issue must not only come under one or another of the particular

exceptions - paragraphs (a) to (j) - listed under Article XX; it must also satisfy the requirements imposed

by the opening clauses of Article XX. The analysis is, in other words, two-tiered: first, provisional

justification by reason of characterization of the measure under XX(g); second, further appraisal of

the same measure under the introductory clauses of Article XX.

The chapeau by its express terms addresses, not so much the questioned measure or its specific

contents as such, but rather the manner in which that measure is applied.43 It is, accordingly, important

to underscore that the purpose and object of the introductory clauses of Article XX is generally the

prevention of "abuse of the exceptions of [what was later to become] Article [XX]."44 This insight

drawn from the drafting history of Article XX is a valuable one. The chapeau is animated by the

principle that while the exceptions of Article XX may be invoked as a matter of legal right, they should

not be so applied as to frustrate or defeat the legal obligations of the holder of the right under the

substantive rules of the General Agreement. If those exceptions are not to be abused or misused, in

other words, the measures falling within the particular exceptions must be applied reasonably, with

due regard both to the legal duties of the party claiming the exception and the legal rights of the other

parties concerned.

The burden of demonstrating that a measure provisionally justified as being within one of the

exceptions set out in the individual paragraphs of Article XX does not, in its application, constitute

43This was noted in the Panel Report on United States - Imports of Certain Automotive Spring Assemblies, BISD 30S/107,

para. 56; adopted on 26 May 1983.

44EPCT/C.11/50, p. 7; quoted in Analytical Index: Guide to GATT Law and Practice, Volume I, p. 564 (1995).

WT/DS2/AB/RPage 23

abuse of such exception under the chapeau, rests on the party invoking the exception. That is, of

necessity, a heavier task than that involved in showing that an exception, such as Article XX(g),

encompasses the measure at issue.

The enterprise of applying Article XX would clearly be an unprofitable one if it involved no

more than applying the standard used in finding that the baseline establishment rules were inconsistent

with Article III:4. That would also be true if the finding were one of inconsistency with some other

substantive rule of the General Agreement. The provisions of the chapeau cannot logically refer to

the same standard(s) by which a violation of a substantive rule has been determined to have occurred.

To proceed down that path would be both to empty the chapeau of its contents and to deprive the

exceptions in paragraphs (a) to (j) of meaning. Such recourse would also confuse the question of whether

inconsistency with a substantive rule existed, with the further and separate question arising under the

chapeau of Article XX as to whether that inconsistency was nevertheless justified. One of the corollaries

of the "general rule of interpretation" in the Vienna Convention is that interpretation must give meaning

and effect to all the terms of a treaty. An interpreter is not free to adopt a reading that would result

in reducing whole clauses or paragraphs of a treaty to redundancy or inutility.45

The chapeau, it will be seen, prohibits such application of a measure at issue (otherwise falling

within the scope of Article XX(g)) as would constitute

(a) "arbitrary discrimination" (between countries where the same conditions prevail);

(b) "unjustifiable discrimination" (with the same qualifier); or

(c) "disguised restriction" on international trade.

The text of the chapeau is not without ambiguity, including one relating to the field of application

of the standards its contains: the arbitrary or unjustifiable discrimination standards and the disguised

restriction on international trade standard. It may be asked whether these standards do not have different

fields of application. Such a question was put to the United States in the course of the oral hearing.

It was asked whether the words incorporated into the first two standards "between countries where

the same conditions prevail" refer to conditions in importing and exporting countries, or only to

conditions in exporting countries. The reply of the United States was to the effect that it interpreted

45E.g., Corfu Channel Case (1949) I.C.J. Reports, p.24 (International Court of Justice); Territorial Dispute Case (Libyan

Arab Jamahiriya v. Chad) (1994) I.C.J. Reports, p. 23 (International Court of Justice); 1966 Yearbook of the International

Law Commission, Vol. II at 219; Oppenheim's International Law (9th ed., Jennings and Watts eds., 1992), Volume 1,

1280-1281; P. Dallier and A. Pellet, Droit International Public, 5è ed. (1994) para. 17.2); D. Carreau, Droit International,(1994) para. 369.

WT/DS2/AB/RPage 24

that phrase as referring to both the exporting countries and importing countries and as between exporting

countries. It also said that the language spoke for itself, but there was no reference to third parties;

while some thought that this was only between exporting countries inter se, there is no support in the

text for that view. No such question was put to the United States concerning the field of application

of the third standard - disguised restriction on international trade. But the United States put forward

arguments designed to show that in the case under appeal, it had met all the standards set forth in the

chapeau. In doing so, it clearly proceeded on the assumption that, whatever else they might relate

to in another case, they were relevant to a case of national treatment where the Panel had found a

violation of Article III:4. At no point in the appeal was that assumption challenged by Venezuela or

Brazil. Venezuela argued that the United States had failed to meet all the standards contained in the

chapeau. So did Norway and the European Communities as third participants. In short, the field of

application of these standards was not at issue.

The assumption on which all the participants proceeded is buttressed by the fact that the chapeau

says that "nothing in this Agreement shall be construed to prevent the adoption or enforcement by any

contracting party of measures ..." The exceptions listed in Article XX thus relate to all of the obligations

under the General Agreement: the national treatment obligation and the most-favoured-nation obligation,

of course, but others as well. Effect is more easily given to the words "nothing in this Agreement",

and Article XX as a whole including its chapeau more easily integrated into the remainder of the General

Agreement, if the chapeau is taken to mean that the standards it sets forth are applicable to all of the

situations in which an allegation of a violation of a substantive obligation has been made and one of

the exceptions contained in Article XX has in turn been claimed.

Against this background, we see no need to decide the matter of the field of application of

the standards set forth in the chapeau nor to make a ruling at variance with the common understanding

of the participants.46

46We note in this connection that two previous panels had occasion to apply the chapeau. In United States - Importsof Certain Automotive Spring Assemblies, BISD 30S/107; adopted on 26 May 1983, the panel had before it a ban on imports,

and an exclusion order of the United States' International Trade Commission, of certain automotive spring assemblies whichthe Commission had found, under Section 337 of the Tariff Act of 1930, to have infringed valid United States patents. The

panel there held that the exclusion order had not been applied in a manner which would constitute a means of "arbitraryor unjustifiable discrimination against countries where the same conditions prevail," because that order was directed against

imports of infringing assemblies "from all foreign sources, and not just from Canada." At the same time, the same order

was also examined and found not to be "a disguised restriction on international trade." Id., paras. 54-56. See also United

States - Prohibition of Imports of Tuna and Tuna Products, BISD 29S/91, para. 4.8; adopted 22 February 1982.

It may be observed that the term "countries" in the chapeau is textually unqualified; it does not say "foreign

countries", as did Article 4 of the 1927 League of Nations International Convention for the Abolition of Import and Export

Prohibitions and Restrictions, 97 L.N.T.S. 393. Neither does the chapeau say "third countries" as did, e.g., bilateral trade(continued...)

WT/DS2/AB/RPage 25

"Arbitrary discrimination", "unjustifiable discrimination" and "disguised restriction" on

international trade may, accordingly, be read side-by-side; they impart meaning to one another. It

is clear to us that "disguised restriction" includes disguised discrimination in international trade. It

is equally clear that concealed or unannounced restriction or discrimination in international trade does

not exhaust the meaning of "disguised restriction." We consider that "disguised restriction", whatever

else it covers, may properly be read as embracing restrictions amounting to arbitrary or unjustifiable

discrimination in international trade taken under the guise of a measure formally within the terms of

an exception listed in Article XX. Put in a somewhat different manner, the kinds of considerations

pertinent in deciding whether the application of a particular measure amounts to "arbitrary or unjustifiable

discrimination", may also be taken into account in determining the presence of a "disguised restriction"

on international trade. The fundamental theme is to be found in the purpose and object of avoiding

abuse or illegitimate use of the exceptions to substantive rules available in Article XX.

There was more than one alternative course of action available to the United States in

promulgating regulations implementing the CAA. These included the imposition of statutory baselines

without differentiation as between domestic and imported gasoline. This approach, if properly

implemented, could have avoided any discrimination at all. Among the other options open to the United

States was to make available individual baselines to foreign refiners as well as domestic refiners. The

United States has put forward a series of reasons why either of these courses was not, in its view,

realistically open to it and why, instead, it had to devise and apply the baseline establishment rules

contained in the Gasoline Rule.

In explaining why individual baselines for foreign refiners had not been put in place, the United

States laid heavy stress upon the difficulties which the EPA would have had to face. These difficulties

related to anticipated administrative problems that individual baselines for foreign refiners would have

generated. This argument was made succinctly by the United States in the following terms:

Verification on foreign soil of foreign baselines, and subsequent enforcement actions,present substantial difficulties relating toproblems arising whenever a country exercisesenforcement jurisdiction over foreign persons. In addition, even if individual baselineswere established for several foreign refiners, the importer would be tempted to claimthe refinery of origin that presented the most benefits in terms of baseline restrictions,

46(...continued)

agreements negotiated by the United States under the 1934 Reciprocal Trade Agreements Act; e.g. the Trade Agreementbetween the United States of America and Canada, 15 November 1935, 168 L.N.T.S. 356 (1936). These earlier treaties

are here noted, not as pertaining to the travaux preparatoires of the General Agreement, but simply to show how in comparable

treaties, a particular intent was expressed with words not found in printer's ink in the General Agreement.

WT/DS2/AB/RPage 26

and tracking the refinery or origin would be very difficult because gasoline is a fungiblecommodity. The United States should not have to prove that it cannot verify informationand enforce its regulations in every instance in order to show that the same enforcementconditions donot prevail in theUnited States and other countries ... The impracticabilityof verification and enforcement of foreign refiner baselines in this instance shows thatthe "discrimination" is based on serious, not arbitrary or unjustifiable, concernsstemming from different conditions between enforcement of its laws in the United Statesand abroad.47

Thus, according to the United States, imported gasoline was relegated to the more exacting

statutory baseline requirement because of these difficulties of verification and enforcement. The United

States stated that verification and enforcement of the Gasoline Rule's requirements for imported gasoline

are "much easier when the statutory baseline is used" and that there would be a "dramatic difference"

in the burden of administering requirements for imported gasoline if individualbaselines were allowed.48

While the anticipated difficulties concerning verification and subsequent enforcement are doubtless

real to some degree, the Panel viewed them as insufficient to justify the denial to foreign refiners of

individual baselines permitted to domestic refiners. The Panel said:

While the Panel agreed that it would be necessary under such a system to ascertainthe origin of gasoline, the Panel could not conclude that the United States had shownthat this could not be achieved by other measures reasonably available to it andconsistent or less inconsistent with the General Agreement. Indeed, the Panel notedthat a determination of origin would often be feasible. The Panel examined, forinstance, the case of a direct shipment to the United States. It considered that therewas no reason to believe that, given the usual measures available in international tradefor determination of origin and tracking of goods (including documentary evidenceand third party verification) there was any particular difficulty sufficient to warrantthe demands of the baseline establishment methods applied by the United States.49

. . .

In the view of the Panel, the United States had reasonably available to it data for, andmeasures of, verification and assessment which were consistent or less inconsistentwith Article III:4. For instance, although foreign data may be formally less subjectto complete control by US authorities, this did not amount to establishing that foreigndata could not in any circumstances be sufficiently reliable to serve U.S. purposes.This, however, was the practical effect of the application of the Gasoline Rule. Inthe Panel' s view, the United States had not demonstrated that data available from foreignrefiners was inherently less susceptible to established techniques of checking,verification, assessment and enforcement than data for other trade in goods subject

47Para. 55 of the Appellant's Submission, dated 4 March 1996. The United States was in effect making the same point

when, at pages 11 and 12 of its Post-Hearing Memorandum, it argued that the conditions were not the same as between theUnited States, on the one hand, and Venezuela and Brazil on the other.

48Supplementary responses by the United States to certain questions of the Appellate Body, dated 1 April 1996.


WT/DS2/AB/RPage 27

to US regulation. The nature of the data in this case was similar to data relied uponby the United States in other contexts, including, for example, under the applicationof antidumping laws. In an antidumping case, only when the information was notsupplied or deemed unverifiable did the United States turn to other information. Ifa similar practice were to be applied in the case of the Gasoline Rule, then importerscould, for instance, be permitted to use the individual baselines of foreign refiners forimported gasoline from those refiners, with the statutory baseline being applied onlywhen the source of imported gasoline could not be determined or a baseline could notbe established because of an absence of data.50

We agree with the finding above made in the Panel Report. There are, as the Panel Report

found, established techniques for checking, verification, assessment and enforcement of data relating

to imported goods, techniques which in many contexts are accepted as adequate to permit international

trade - trade between territorial sovereigns - to go on and grow. The United States must have been

aware that for these established techniques and procedures to work, cooperative arrangements with

both foreign refiners and the foreign governments concerned would have been necessary and appropriate.

At the oral hearing, in the course of responding to an enquiry as to whether the EPA could have adapted,

for purposes of establishing individual refinery baselines for foreign refiners, procedures for verification

of information found in U.S. antidumping laws, the United States said that "in the absence of refinery

cooperation and the possible absence of foreign government cooperation as well", it was unlikely that

the EPA auditors would be able to conduct the on-site audit reviews necessary to establish even the

overall quality of refineries' 1990 gasoline.51 From this statement, there arises a strong implication,

it appears to the Appellate Body, that the United States had not pursued the possibility of entering into

cooperative arrangements with the governments of Venezuela and Brazil or, if it had, not to the point

where it encountered governments that were unwilling to cooperate. The record of this case sets out

the detailed justifications put forward by the United States. But it does not reveal what, if any, efforts

had been taken by the United States to enter into appropriate procedures in cooperation with the

governments of Venezuela and Brazil so as to mitigate the administrative problems pleaded by the United

States.52 The fact that the United States Congress might have intervened, as it did later intervene, in


51Supplementary responses to the United States to certain questions of the Appellate Body, dated 1 April 1996.

52While it is not for the Appellate Body to speculate where the limits of effective international cooperation are to be found,

reference may be made to a number of precedents that the United States (and other countries) have considered it prudentto use to help overcome problems confronting enforcement agencies by virtue of the fact that the relevant law and the authority

of the enforcement of the agency does not hold sway beyond national borders. During the course of the oral hearing, attention

was drawn to the fact that in addition to the antidumping law referred to by the Panel in the passage cited above, there were

other US regulatory laws of this kind, e.g., in the field of anti-trust law, securities exchange law and tax law. There are

cooperative agreements entered into by the US and other governments to help enforce regulatory laws of the kind mentioned

and to obtain data from abroad. There are such agreements, inter alia, in the anti-trust and tax areas. There are also, within

the framework of the WTO, the Agreement on the Implementation of Article VI of GATT 1994, (the "Antidumping Agreement"),

the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement") and the Agreement on Pre-Shipment Inspection,all of which constitute recognition of the frequency and significance of international cooperation of this sort.

WT/DS2/AB/RPage 28

the process by denying funding, is beside the point: the United States, of course, carries responsibility

for actions of both the executive and legislative departments of government.

In its submissions, the United States also explained why the statutory baseline requirement

was not imposed on domestic refiners as well. Here, the United States stressed the problems that

domestic refineries would have faced had they been required to comply with the statutory baseline.

The Panel Report summarized the United States' argument in the following terms:

The United States concluded that, contrary to Venezuela' s and Brazil' s claim, Article XXdid not require adoption of the statutory baseline as a national standard even if thedifficulties associated with the establishment of individual baselines for importers wereinsurmountable. Application of the statutory baseline to domestic producers ofreformulated and conventional gasoline in 1995 would have been physically andfinancially impossible because of the magnitude of the changes required in almost allUS refineries; it thus would have caused a substantial delay in the programme.Weighing the feasibility of policy options in economic or technical terms in order tomeet an environmental objective was a legitimate consideration, and did not, in itself,constitute protectionism, as alleged by Venezuela and Brazil. Article XX did not requirea government to choose the most expensive possible way to regulate its environment.53

(emphasis added)

Clearly, the United States did not feel it feasible to require its domestic refiners to incur the

physical and financial costs and burdens entailed by immediate compliance with a statutory baseline.

The United States wished to give domestic refiners time to restructure their operations and adjust to

the requirements in the Gasoline Rule. This may very well have constituted sound domestic policy

from the viewpoint of the EPA and U.S. refiners. At the same time we are bound to note that, while

the United States counted the costs for its domestic refiners of statutory baselines, there is nothing

in the record to indicate that it did other than disregard that kind of consideration when it came to foreign

refiners.

We have above located two omissions on the part of the United States: to explore adequately

means, including in particular cooperation with the governments of Venezuela and Brazil, of mitigating

the administrative problems relied on as justification by the United States for rejecting individual baselines

for foreign refiners; and to count the costs for foreign refiners that would result from the imposition

of statutory baselines. In our view, these two omissions go well beyond what was necessary for the

Panel to determine that a violation of Article III:4 had occurred in the first place. The resulting

discrimination must have been foreseen, and was not merely inadvertent or unavoidable. In the light


WT/DS2/AB/RPage 29

of the foregoing, our conclusion is that the baseline establishment rules in the Gasoline Rule, in their

application, constitute "unjustifiable discrimination" anda "disguised restriction on international trade."

We hold, in sum, that the baseline establishment rules, although within the terms of Article XX(g),

are not entitled to the justifying protection afforded by Article XX as a whole.

V. FINDINGS AND CONCLUSIONS

For the reasons set out in the preceding sections of this report, the Appellate Body has reached

the following conclusions:

(a) the Panel erred in law in its conclusion that the baseline establishment rules contained

in Part 80 of Title 40 of the Code of Federal Regulations did not fall within the terms

of Article XX(g) of the General Agreement;

(b) the Panel accordingly also erred in law in failing to decide whether the baseline

establishment rules contained in Part 80 of Title 40 of the Code of Federal Regulations

fell within the ambit of the chapeau of Article XX of the General Agreement;

(c) the baseline establishment rules contained in Part 80 of Title 40 of the Code of Federal

Regulations fail to meet the requirements of the chapeau of Article XX of the General

Agreement, and accordingly are not justified under Article XX of the General

Agreement.

The foregoing legal conclusions modify the conclusions of the Panel as set out in paragraph 8.1

of its Report. The Appellate Body's conclusions leave intact the conclusions of the Panel that were

not the subject of appeal.

The Appellate Body recommends that the Dispute Settlement Body request the United States

to bring the baseline establishment rules contained in Part 80 of Title 40 of the Code of Federal

Regulations into conformity with its obligations under the General Agreement.

It is of some importance that the Appellate Body point out what this does not mean. It does

not mean, or imply, that the ability of any WTO Member to take measures to control air pollution

or, more generally, to protect the environment, is at issue. That would be to ignore the fact that

WT/DS2/AB/RPage 30

Article XX of the General Agreement contains provisions designed to permit important state interests -

including the protection of human health, as well as the conservation of exhaustible natural resources -

to find expression. The provisions of Article XX were not changed as a result of the Uruguay Round

of Multilateral Trade Negotiations. Indeed, in the preamble to the WTO Agreement and in the Decision

on Trade and Environment,54 there is specific acknowledgement to be found about the importance of

coordinating policies on trade and the environment. WTO Members have a large measure of autonomy

to determine their own policies on the environment (including its relationship with trade), their

environmental objectives and theenvironmental legislation they enact and implement. So far as concerns

the WTO, that autonomy is circumscribed only by the need to respect the requirements of the General

Agreement and the other covered agreements.

Signed in the original at Geneva this 22nd day of April 1996 by:

___________________________Florentino P. Feliciano

Presiding Member

___________________________ _______________________________Christopher Beeby Mitsuo Matsushita

Member Member

54Adopted by Ministers at the Meeting of the Trade Negotiations Committee in Marrakesh on 14 April 1994.

RESTRICTED

WORLD TRADE WT/DS2/R

29 January 1996


United States -

Standards for Reformulated

and Conventional Gasoline

Report of the Panel

Table of Contents

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. FACTUAL ASPECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A. The Clean Air Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

B. EPA's Gasoline Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1. Establishment of Baselines . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Reformulated Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3. Conventional Gasoline (or "Anti-Dumping Rules") . . . . . . . . 4

C. The May 1994 Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

III. MAIN ARGUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

A. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

B. The General Agreement on Tariffs and Trade . . . . . . . . . . . . . . . . 6

1. Article I - General Most-Favoured-Nation Treatment . . . . . . . 6

2. Article III - National Treatment on Internal Taxationand Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

a) Article III:4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

b) Article III:1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

3. Article XX - General Exceptions . . . . . . . . . . . . . . . . . . . . 15

4. Article XX(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

a) "Protection of Human, Animal and Plant Lifeor Health" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

b) "Necessary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

5. Article XX(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

6. Article XX(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

a) "Related to the conservation of exhaustible naturalresources..." . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

b) "... made effective in conjunction with restrictionson domestic production or consumption" . . . . . . . . . . 23

7. Preamble to Article XX . . . . . . . . . . . . . . . . . . . . . . . . . . 23

8. Article XXIII - Nullification and Impairment . . . . . . . . . . . . 25

ii

C. Agreement on Technical Barriers to Trade . . . . . . . . . . . . . . . . . . 25

1. Article 2 - Preparation, Adoption and Application of TechnicalRegulations by Central Government Bodies . . . . . . . . . . . . . 25

a) Whether or Not the Gasoline Rule is a TechnicalRegulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

b) Article 2.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

c) Article 2.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

2. Article 12 - Special and Differential Treatment of DevelopingCountry Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

IV. SUBMISSIONS BY INTERESTED THIRD PARTIES . . . . . . . . . . . . . . . 28

A. The European Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

B. Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

V. INTERIM REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

VI. FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

B. Article III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

1. Article III:4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

2. Article III:1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

C. Article I:1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

D. Article XX(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

1. Policy goal of protecting human, animal or plant life or health 38

2. Necessity of the inconsistent measure . . . . . . . . . . . . . . . . . 39

E. Article XX(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

1. Securing compliance with consistent laws or regulations . . . . . 43

2. Other conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

F. Article XX(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

1. Policy goal of conserving an exhaustible natural resource . . . . 44

iii

2. Measure "related to" the conservation of an exhaustible naturalresource; and made effective "in conjunction" with restrictionson domestic production or consumption . . . . . . . . . . . . . . . . 45

G. Article XXIII:1(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

H. Applicability of the Agreement on Technical Barriers to Trade . . . . 46

VII. CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

VIII. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

I. INTRODUCTION

1.1 On 23 January 1995, the United States received a request from Venezuela to holdconsultations under Article XXII:1 of the General Agreement on Tariffs and Trade 1994 ("GeneralAgreement"), Article 14.1 of the Agreement on Technical Barriers to Trade ("TBT Agreement")and Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes("DSU"), on the rule issued by the Environmental Protection Agency on 15 December 1993,entitled "Regulation of Fuels and Fuel Additives - Standards for Reformulated and ConventionalGasoline" (WT/DS2/1). The consultations between Venezuela and the United States took place on24 February 1995. As they did not result in a satisfactory solution of the matter, Venezuela, in acommunication dated 25 March 1995, requested the Dispute Settlement Body ("DSB") to establisha panel to examine the matter under Article XXIII:2 of the General Agreement and Article 6 ofthe DSU (WT/DS2/2). On 10 April 1995, the DSB established a panel in accordance with therequest made by Venezuela. On 28 April 1995, the parties to the dispute agreed that the Panelshould have standard terms of reference (DSU, Art. 7) and agreed on the composition of the Panelas follows:

Chairman: Mr. Joseph WongMembers: Mr. Crawford Falconer

Mr. Kim Luotonen

1.2 On 10 April 1995, Brazil requested the United States to hold consultations underArticle XXII:1 of the General Agreement, Article 14.1 of the TBT Agreement and Article 4 of theDSU on the rule issued by the Environmental Protection Agency on 15 December 1993 entitled"Regulation on Fuels and Fuel Additives - Standards for Reformulated and ConventionalGasoline" (WT/DS4/1). Consultations between Brazil and the United States were held on1 May 1995 without resulting in a satisfactory solution of the matter. In a communication dated19 May 1995, Brazil requested the DSB to establish a panel to examine the matter pursuant toArticle XXIII of the General Agreement, Article 14 of the Agreement on Technical Barriers toTrade and Article 6 of the DSU. On 31 May 1995, the DSB established a Panel in accordancewith the request made by Brazil.

1.3 On 31 May 1995, pursuant to Article 9 of the DSU in respect of multiple complainants,the DSB decided, with the agreement of all the parties, that for practical reasons this matter beexamined by the Panel already established at the request of Venezuela on 10 April 1995. Thedate of the constitution of the Panel, namely 28 April 1995, remained unchanged.

1.4 Due to the additional task given to the Panel, the DSB agreed upon, at the same meeting,the following terms of reference:

"To examine, in the light of the relevant provisions of the covered agreements cited byVenezuela in document WT/DS2/2 and by Brazil in document WT/DS4/2, the mattersreferred to the DSB by Venezuela and Brazil in those documents and to make suchfindings as will assist the DSB in making the recommendations or in giving the rulingsprovided for in those agreements".

1.5 The Chairman of the DSB recalled Article 9.2 of the DSU which provides that "the rightswhich the parties to the dispute would have enjoyed had separate panels examined the complaintsare in no way impaired".

1.6 Australia, Canada, the European Communities and Norway reserved their rights toparticipate in the Panel proceedings as third parties. Only the European Communities andNorway presented arguments to the Panel.

WT/DS2/RPage 2

1.7 The Panel met with the parties to the dispute from 10 to 12 July 1995 and from 13 to15 September 1995. It met with the interested third parties on 11 July 1995.

1.8 On 21 September 1995, the Chairman of the Panel informed the DSB that the Panel wouldnot be able to issue its report within six months. The reasons for that delay are stated indocument WT/DS2/5.

1..9 The Panel issued its interim report to the parties on 11 December 1995. Following arequest made by the United States pursuant to Article 15.2 of the DSU, the Panel held a furthermeeting with the parties on 3 January 1996.

1.10 The Panel issued its final report to the parties to the dispute on 17 January 1996.

II. FACTUAL ASPECTS

A. The Clean Air Act

2.1 The Clean Air Act ("CAA"), originally enacted in 1963, aims at preventing andcontrolling air pollution in the United States. In a 1990 amendment to the CAA1, Congressdirected the Environmental Protection Agency ("EPA") to promulgate new regulations on thecomposition and emissions effects of gasoline in order to improve air quality in the most pollutedareas of the country by reducing vehicle emissions of toxic air pollutants and ozone-formingvolatile organic compounds. These new regulations apply to US refiners, blenders and importers.

2.2 Section 211(k) of the CAA divides the market for sale of gasoline in the United States intotwo parts. The first part, which covers approximately 30 percent of gasoline marketed in theUnited States, consists of the nine large metropolitan areas that experienced the worst summertimeozone pollution during the period 1987-1989, plus any areas that do not meet national ozonerequirements and are added at the request of the governor of the state. These areas are referred toas ozone "nonattainment areas", and in this part of the United States only "reformulated gasoline"may be sold to consumers. In the rest of the United States, "conventional gasoline" may be soldto consumers.

2.3 Section 211(k)(2)-(3) of the CAA established certain compositional and performancespecifications for reformulated gasoline. The oxygen content must not be less than 2.0 percent byweight, the benzene content must not exceed 1.0 percent by volume and the gasoline must be freeof heavy metals, including lead or manganese. The performance specifications of the CAArequire a 15 percent reduction in the emissions of both volatile organic compounds ("VOCs") andtoxic air pollutants ("toxics") and no increase in emissions of nitrogen oxides ("NOx"). Theserequirements are measured by comparing the performance of reformulated gasoline in baselinevehicles (representative model year 1990 vehicles) against the performance of "baseline gasoline"in such vehicles. Section 211(k)(10) of the CAA defines the specifications of baseline gasolinesold in the summer, which is the high ozone season, and leaves the specifications of winterbaseline gasoline to be determined by EPA. It provides, however, that the specifications forwinter gasoline shall be those of the industry average gasoline sold in 1990. For the year 2000and beyond, the CAA requires that new reformulated gasoline requirements be developed thatrequire a 20-25 percent reduction in emissions of VOCs and toxics, depending on EPA'sconsiderations of feasibility and cost.

142 U.S.C. §7545(k).

WT/DS2/RPage 3

2.4 The CAA also sets requirements for conventional gasoline, which ensure that eachrefiner's, blender's or importer's conventional gasoline sold in the rest of the country remains asclean as it was in 1990. This programme is known as "anti-dumping rules" because it is designedto prevent refiners, blenders or importers from dumping into conventional gasoline fuelcomponents that are restricted in reformulated gasoline and that cause environmentally harmfulemissions. To accomplish this, section 211(k)(8) of the CAA provides that no refiner, blender orimporter of gasoline may sell conventional gasoline that emits VOCs, toxics, NOx or carbonmonoxide ("pollutants") in greater amounts than the gasoline sold in the United States by thatrefiner, blender or importer in 1990. In order to implement this provision, separate individualbaselines must be established for refiners, blenders or importers based on the gasoline they sold in1990. That permits determination of whether the emissions from a refiner's, blender's andimporter's conventional gasoline (post-1994 gasoline) are greater than the emissions from its 1990gasoline. If, however, EPA determines that no adequate and reliable data exist regarding thecomposition of such 1990 gasoline sold by a refiner, blender or importer, the statutory baselinegasoline is applied. The statutory annual baseline values are calculated using a seasonal weightingof the statutory summer baseline, as defined in the CAA, and the statutory winter baseline, asdetermined by EPA.

B. EPA's Gasoline Rule

1. Establishment of Baselines

2.5 The CAA directed EPA to determine the quality of 1990 gasoline, to which reformulatedand conventional gasoline would be compared in the future: these determinations are known as"baselines". EPA set historic baselines for individual entities, and established a statutory baseline,intended to reflect average US 1990 gasoline quality, which would be used instead of the historicindividual baselines for those entities who were determined to be lacking adequate and reliabledata regarding the quality of the gasoline they produced in 1990.

2.6 EPA's final rule2 ("Gasoline Rule") requires any domestic refiner, which was in operationfor at least 6 months in 1990, to establish an individual refinery baseline, which represents thequality of gasoline produced by that refiner in 1990. The rule establishes three methods for thepurpose of determining a domestic refiner's individual historic baseline. Under Method 1, therefiner must use the quality data and volume records of its 1990 gasoline. However, asacknowledged by EPA at the time, it was not anticipated that many domestic refiners would haveall the data necessary to establish an individual baseline based entirely on actual 1990 data. IfMethod 1 type data are not available, a domestic refiner must use its 1990 gasoline blendstockquality data and 1990 blendstock production records (Method 2). In the event that neither one ofthese two methods is available, a domestic refiner must turn to Method 3 type data which consistof its post-1990 gasoline blendstock and/or gasoline quality data modeled in light of refinerychanges to show 1990 gasoline composition. Domestic refiners are not permitted to choose thestatutory baseline.

2.7 An importer which is also a foreign refiner must determine its individual baseline usingMethods 1, 2 and 3 if it imported at least 75 percent, by volume, of the gasoline produced at itsforeign refinery in 1990 into the United States in 1990 (the so-called "75 % rule")3.

240 CFR 80, 59-Fed. Reg. 7716 (16 February 1994).

340 CFR 80.91(b)(ii).

WT/DS2/RPage 4

2.8 Certain entities are, however, automatically assigned to the statutory baseline. Firstly,refineries which began operation after 1990 or were in operation for less than 6 months in 1990are required to use the statutory baseline. Secondly, importers and blenders are assigned thestatutory baseline unless they can establish their individual baseline following Method 1. If actual1990 data are not available, which is, as for domestic refiners, anticipated by EPA, importers andblenders are assigned to the statutory baseline. EPA considers that blenders which producegasoline by combining gasoline blendstocks purchased from many sources cannot determine withaccuracy the quality of their 1990 gasoline using Methods 2 and 3. Similarly, EPA considers thatimporters cannot use Methods 2 and 3, because these methods inherently apply only to refineriesand because of the extreme difficulty in establishing the consistency of their gasoline quality overtime.

2. Reformulated Gasoline

2.9 Regarding the implementation of the regulations for reformulated gasoline, EPA proposesa two-step approach. From 1 January 1995 to 1 January 1998, EPA enforces an interimprogramme called the "Simple Model". Under this programme, reformulated gasoline sold in theUnited States by domestic refiners will be subject to requirements established with reference to theindividual baseline for certain gasoline qualities and requirements specified in the Gasoline Rulefor other gasoline qualities. More specifically, the parameters sulphur, olefins and T-90 aremeasured against each US refiner's individual 1990 baseline and must be maintained at or belowthese 1990 levels (these are called "non-degradation requirements"). The requirements regardingfour other gasoline qualities (Reid Vapour Pressure, oxygen, benzene and toxics performance) arespecified by EPA in the Gasoline Rule4. Importers of foreign gasoline also have to comply withthe requirements set out in the final rule regarding Reid Vapour Pressure, oxygen, benzene andtoxics performance. However, importers cannot use individual 1990 baseline for sulphur, olefinsand T-90, but have to comply with levels specified in the statutory baseline for these parameters.Under the Simple Model, requirements for sulphur, olefins and T-90 must be met on an annualaverage basis. EPA adopted the individual baseline approach for these parameters in the SimpleModel because at the time it was formulating its regulation, it considered that the available dataregarding sulphur, olefins and T-90 did not permit an assessment of the precise effects of thesecomponents on the emissions level of gasoline. Given this uncertainty, EPA did not want torequire refiners immediately to make refinery changes which might later prove to be unnecessary,given the greater flexibility provided by the Complex Model.

2.10 As of 1 January 1998, EPA will enforce the "Complex Model", which will apply thesame emissions reduction requirements to all producers of reformulated gasoline. The individualbaselines for sulphur, olefins and T-90 will no longer apply.

3. Conventional Gasoline (or "Anti-Dumping Rules")

2.11 The 1990 Amendment to the CAA requires that, as of 1 January 1995, each refiner's,blender's or importer's conventional gasoline sold in the United States be no more polluting thanthe gasoline sold by that refiner, blender or importer in 19905. EPA requires domestic refiners tomeasure non-degradation requirements for conventional gasoline against their individual baselineswhile importers of foreign gasoline are assigned to the statutory baseline. However, in thisprogramme, the non-degradation requirements apply to all conventional gasoline requirements,and not only to sulphur, olefins and T-90. Requirements must be met on an average annual basis.

440 CFR 80.41.

542 U.S.C. § 7545 (CAA 211(k)(8)).

WT/DS2/RPage 5

The Gasoline Rule limits ("caps") the volume of conventional gasoline that is subject to anindividual baseline to the volume of gasoline produced in 1990 by that entity; all conventionalgasoline produced in excess of the specific volume cap is measured against the statutory baseline.

2.12 Domestic refiners and importers of conventional gasoline, unlike those of reformulatedgasoline, will still be subject to different baselines after the entry into force of the Complex Modelin 1998.

C. The May 1994 Proposal

2.13 In view of the comments made by interested parties during the rulemaking process of thefinal Gasoline Rule, EPA proposed, in May 1994, to amend the reformulated gasoline regulationin order to define criteria and procedures by which foreign refiners could establish individualrefinery baselines in a manner similar to that required for domestic refiners6. Pursuant to thisproposal, foreign refiners would be allowed to establish an individual baseline using Methods 1, 2or 3. If the individual baseline was approved by EPA, importers could use it for the purpose ofcertifying the portion of reformulated gasoline imported from that particular refinery into theUnited States. However, the use of individual foreign refinery baselines would be subject tovarious additional strict requirements, aiming at ensuring the accuracy and respect of the foreignrefinery's individual baseline with respect to gasoline shipped to the United States and verifyingthe refinery of origin. Furthermore, it would not apply to conventional gasoline. After a publiccomment period, the US Congress enacted legislation in September 1994 denying funding to EPAfor implementation of the May 1994 Proposal.

III. MAIN ARGUMENTS

A. General

3.1 Venezuela and Brazil requested the Panel to find that the final rule promulgated by theUnited States' Environmental Protection Agency ("EPA") on 15 December 1993 and entitled"Fuels and Fuel Additives - Standards for Reformulated and Conventional Gasoline" ("GasolineRule") was:

(a) contrary to Articles I and III of GATT 1994;(b) not covered by any of the exceptions under Article XX of GATT 1994;(c) contrary to Article 2 of the Agreement on Technical Barriers to Trade.

3.2 Venezuela additionally requested the Panel to find that the Gasoline Rule nullified andimpaired benefits accruing to Venezuela under the General Agreement within the meaning ofArticle XXIII:1(b).

3.3 Accordingly, Venezuela and Brazil asked the Panel to recommend that the United Statestake all necessary steps to bring the Gasoline Rule into conformity with its obligations under theGeneral Agreement and the TBT Agreement. Venezuela requested the Panel to recommend thatthe United States amend the Gasoline Rule to provide treatment for gasoline imports no lessfavourable than that accorded to US produced gasoline.

3.4 The United States requested the Panel to find that the Gasoline Rule was:

640 CFR 80 (59 Fed. Reg. 22800, 3 May 1994).

WT/DS2/RPage 6

(a) consistent with Articles I and III of the General Agreement 1994;(b) falling within the scope of Article XX (b), (d), and (g) of GATT 1994;(c) consistent with the Agreement on Technical Barriers to Trade.

B. The General Agreement on Tariffs and Trade

1. Article I - General Most-Favoured-Nation Treatment

3.5 Venezuela and Brazil argued that the rule allowing an importer which was also a foreignrefiner to establish its individual baseline, provided that it imported into the United States at least75 percent of the gasoline produced at that refinery in 1990 ("75 % rule"), granted an advantageto gasoline exported from certain third countries in violation of Article I of the GeneralAgreement.

3.6 Venezuela argued that the 75 % rule applied only to a fixed, finite and easily determinablegroup of countries, determined only by historical facts. Hence, no importer or foreign refinercould take any action that would alter its ability to benefit from this rule. According toinformation submitted to Venezuela by the United States, refineries based in Canada only werelikely to meet the criteria. A previous panel report had found that the European Community'smeat quality regulations requiring certification of imported beef by the US Department ofAgriculture were inconsistent with Article I of the General Agreement because "[E]xports of likeproducts of other origin than that of the United States were in effect denied access to the EECmarket considering that the only certifying agency authorized to certify the meat ... was a UnitedStates agency mandated to certify only meat from the United States"7. As a matter of fact, onlycertain countries could benefit from this provision. This was, accordingly, a breach of Article I.

3.7 Brazil submitted that the two criteria contained in the 75 % rule, i.e. the ownerrelationship between the importer and the foreign refiner and the percentage of gasoline itimported into the United States, were not neutral but had been chosen so as to suit a particularcategory of countries and therefore constituted an "advantage" within the meaning of Article I.These criteria had no link with the characteristics of gasoline as a product. Thus, the 75 % ruleapplied a different and more favourable standard to imports from some foreign refineries than itapplied to imports from refineries in other countries.

3.8 The United States replied that the 75 % rule did not provide an "advantage" to theproducts of any particular country. The 75 % rule would have applied to any importer that couldmeet its two objective criteria, regardless of the country of origin of the gasoline. TheUnited States specified that the 75 % requirement represented the minimally acceptable value toensure that the importer's individual baseline determined under Methods 1, 2 and 3 would beaccurate. (In fact, most foreign refiners were unlikely to export more than 30 % of theirgasoline). Secondly, the criterion requiring that the importer and foreign refiner be the same entityeliminated the enforcement concerns arising in relation with the establishment of an individualbaseline for a foreign refiner. The United States considered that Venezuela's invocation of thepanel report "European Economic Community - Imports of Beef From Canada" was inappositebecause, in that dispute, the EC regulation at issue expressly listed the US Department ofAgriculture (USDA) as the only certifying authority for the meat in question, and USDA was onlyauthorized to certify US meat. In that case, the certifying process itself guaranteed that only USbeef would be certified, thereby expressly favouring US beef over that of all other countries. Incontrast, the 75 % rule expressly requires any importer that meets its objective criteria to establish

7"European Economic Community - Imports of Beef From Canada", BISD 28S/92 (adopted on 10 March 1981), paragraph 4.2(a).

WT/DS2/RPage 7

an individual baseline for its gasoline. The United States also noted that the regulatory deadlinefor individual baseline applications under the 75 % rule had elapsed without any company meetingthe criteria. The 75 % rule had no application and could therefore not be inconsistent with anyprovisions of the General Agreement.

3.9 Venezuela considered that the United States interpreted too narrowly the panel report"EEC - Imports of Beef From Canada" when saying that the favoured country must be expresslyidentified in order for the regulation to violate Article I. A rule violated Article I when itstipulated, like the 75 % rule, that the products of only some countries could qualify.

3.10 Venezuela and Brazil considered that the fact that the 75 % rule had no application shouldnot prevent the Panel from ruling on it. Venezuela considered that the mere existence of such aregulation might have inhibiting effects on commercial and investment decisions. Thus, thepossibility of its future application was sufficient to establish an Article I violation. Brazil addedthat a clear ruling on the 75 % rule was necessary because it would dissuade countries fromdesigning future standards that, being neutral at first sight, were in fact designed to fit only theprecise situation of their own multinationals, thus threatening the integrity of Article I.

2. Article III - National Treatment on Internal Taxation and Regulation

a) Article III:4

3.11 Venezuela and Brazil stressed that they were not questioning the right of the United Statesto enact stringent environmental standards and regulations in order to improve air quality withinthe US territory provided these standards and regulations treated imported products no lessfavourably than domestic like products.

3.12 Venezuela and Brazil argued that the Gasoline Rule, by denying foreign refiners thepossibility to establish an individual baseline, violated Article III:4 because it accorded lessfavourable treatment to imported gasoline, both reformulated and conventional, than to USgasoline. The Gasoline Rule required imported gasoline to conform with the more stringentstatutory baseline when US gasoline had to comply only with a US refiner's individual baseline.Practically, this meant that imported gasoline with certain parameter levels above the statutorybaseline could not be directly sold in the US market whereas gasoline with these same qualitiesproduced in a US refinery could be freely sold on the US market provided that it conformed withthat refiner's individual baseline. In order to accommodate this situation, foreign refiners had twooptions: (i) make expensive investments and changes to their refineries in order to producegasoline conforming to the more stringent statutory baseline, or (ii) supply at a lower pricegasoline to an importer that could average that gasoline with other gasolines (if such othergasolines exist in sufficient amount) in order to meet, over an annual period, the requirements ofthe statutory baseline. Both options adversely affected the conditions of competition for importedgasoline and afforded protection to domestic production in a manner contrary to Article III.Furthermore, these adverse competitive effects were precisely what EPA intended to avoid for USrefiners by granting them individual baselines. Brazil added that it was up to the United States todemonstrate that its discriminatory system did not treat imports less favourably.

3.13 Venezuela and Brazil held that officials from the US government had acknowledged onvarious occasions that the Gasoline Rule discriminated against imported gasoline and accordedmore favourable treatment to domestically produced gasoline. Venezuela added that another USgovernment official had publicly stated that such discrimination was intentionally endorsed as ameans of affording protection to US gasoline. These statements showed that the Gasoline Rulediscriminated both in effect and in intent against foreign refiners. Venezuela and Brazil further

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argued that EPA's 1994 proposed amendments to the Gasoline Rule ("1994 Proposal")acknowledged that the discriminatory treatment of imported gasoline was inconsistent with theUnited States' obligations under the General Agreement. Venezuela and Brazil argued that the1994 Proposal would have partly eliminated the discrimination by providing for the establishmentof individual baselines by foreign refiners of reformulated gasoline; however, the discriminatorytreatment of conventional gasoline would have continued.

3.14 Venezuela noted that "Petroleos de Venezuela, S.A." ("PDVSA") had already made costlyadjustments to its production in order to meet the statutory baseline requirements and hadaccelerated its programme of investments with a view to complying with the Complex Modelrequirements. These adjustments had reduced the volume and value of Venezuela's current andanticipated gasoline exports to the United States below the levels that would have prevailed ifPDVSA were allowed to establish its individual baseline. These adjustments interfered withPDVSA's investment programme, obliging it to focus on production for the US gasoline marketand adversely affecting other important investment projects.

3.15 Brazil stated in addition that application of the statutory baseline to foreign refiners anddomestic importers was discriminatory in several respects. First, the flexibility given to domesticrefiners in establishing individual baselines had the effect that many of them were allowedemissions levels higher than those permitted by the statutory baseline. Secondly, the statutorybaseline was more stringent than the average of the individual baselines for refineries located inthe Eastern and Gulf Coast states (where virtually all Brazilian gasoline was sold) because of theinclusion in the national average of the strict 1990 Californian standards. The Gasoline Rule alsofavoured imports by domestic refiners over imports by importers who were not domestic refiners.Domestic refiners whose current production was "cleaner" than their individual baseline couldimport gasoline with parameter levels above the statutory baseline, could blend it with their owncleaner production and sell it on the US market as long as the mixture conformed with theirindividual baseline. Importers who were not domestic refiners had to conform to the statutorybaseline in all instances. Thus, the Gasoline Rule affected the distribution of gasoline in theUnited States by channelling imports to domestic refiners who had an incentive to take advantageof their privileged position by demanding lower prices from foreign refiners.

3.16 Brazil stated that the same gasoline that it used to export to the United States market as"finished" gasoline was, since the entry into force of the Gasoline Rule, considered only as"blendstock8", which was sold at a lower price. Thus, Brazil had not been able to export"finished" conventional gasoline to the US market since 1 January 1995. Brazilian refiners werenot currently producing reformulated gasoline .

3.17 The United States replied that the Gasoline Rule did not treat imported gasoline lessfavourably than domestic gasoline overall. The environmental goal of the Gasoline Rule was toregulate the overall quality of the gasoline sold in the United States. Each importer had to satisfyon average the statutory baseline, which approximated average gasoline quality consumed in theUS in 1990, and domestic refiners had to satisfy on average their 1990 individual baselines, whichoverall roughly represented 1990 US gasoline quality. Hence, overall domestically producedgasoline had to be at least as clean as foreign gasoline since roughly half of domestic gasolinewould be "cleaner" and roughly half would be dirtier than gasoline using the statutory baseline.The United States supplied the Panel with data documenting the number of domestic refiners withbaseline values both above and below the statutory baseline for specific parameters and emissionslevels upon which compliance with the non-degradation requirements was based. This analysis

8Blendstock is unfinished gasoline which has to be blended in order to be sold as finished gasoline.

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showed that five domestic refineries had individual baselines that were below the annual statutorybaseline for all fuel parameters and emissions levels, and three domestic refiners had individualbaselines that were above the annual statutory baseline for all fuel parameters and emissionslevels. Thus, most refiners had individual baselines with several parameters above thecorresponding statutory values and several below. The United States considered that a previouspanel report had recognized that "there may be cases where application of formally identical legalprovisions would in practice accord less favourable treatment to imported products and acontracting party might thus have to apply different legal provisions to imported products toensure that the treatment accorded them is in fact no less favourable"9. Since the majority ofimporters did not have the necessary data to use Methods 1, 2, or 3, they would be precludedfrom supplying the US market as they would be unable to establish an individual baseline. Infact, the Gasoline Rule granted more favourable treatment to imports since identical treatmentwould have in practice excluded imported gasoline from the US market.

3.18 The United States argued that the Gasoline Rule applied to imported gasoline and not toforeign refiners producing gasoline. Moreover, foreign refiners were not required to producegasoline that met any baseline at all, but could produce gasoline which was cleaner or dirtier thanthe statutory baseline. The baseline establishment rule focused on the importer of foreign gasolinebecause the United States was not attempting to regulate the conduct of foreign companies orthose of other overseas entities; the importer was the first entity, within US territory, that hadcontrol over the quality of gasoline imported into the United States. Thus, foreign refiners weresubject only to the independent purchasing decisions of US importers who had to balance theproducts of one or more foreign refiners with that of another in order to comply with the statutorybaseline. The fact that no single batch of gasoline would be deemed as non-complying providedadditional flexibility to both importers and foreign refiners. Moreover, the complainants' focus onequal treatment of individual foreign refiners was misplaced since the General Agreement appliedto the imported product and not to the producer.

3.19 The United States argued that gasoline from importers was treated similarly to gasolinefrom similarly situated domestic parties. For instance, imported gasoline was treated identically togasoline produced by domestic refiners with limited 1990 operations or to gasoline produced byUS blenders whose business entailed a lack of consistency of sources and quality of the gasolineproduced. These producers had in common with the importers the inability to establish anaccurate individual baseline because their business characteristics or history were such that theycould not determine the quality of their gasoline as required by Methods 2 and 3. Althoughtheoretically, the 1990 gasoline quality of an importer might be established by first determiningthe refineries of origin for all of the gasoline imported by that importer in 1990, and thenobtaining accurate and verifiable information on the quality of that subset of 1990 gasolineproduced at the refinery and exported to the particular US importer, the United States expectedthat only a very limited number of importers would be able to establish an individual baselineusing such a procedure. In addition, there were significant problems associated with establishingthe 1990 gasoline quality of foreign refiners: tracking the refinery of origin of the importedgasoline, establishing the quality of the small subset of gasoline shipped to the United States andlack of adequate enforcement capacity. According to the United States, these factors made it verydifficult to verify the accuracy or reliability of claims regarding a foreign refiner's 1990 gasolinequality for that purpose. On the other hand, gasoline produced by domestic refiners was madefrom crude oil whose quality could easily be documented, as were the characteristics of thephysical plant and operational procedures. Thus, the quality of the gasoline produced at such adomestic refinery could be accurately assessed. The United States further argued that imported

9"United States - Section 337 of the Tariff Act of 1930", BISD 36S/345 (adopted on 7 November 1989).

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gasoline and domestically produced gasoline were in the same position with regard to theflexibility for complying with their respective baselines. As various qualities of gasoline wereavailable in the market, some above and some below the statutory baseline, an importer hadcomplete flexibility to select gasoline from different sources and mix them in order to reach theannual average quality required by the statutory baseline. By contrast, a domestic refiner wasconstrained by its refinery equipment and crude oil supplies.

3.20 The United States considered that Venezuela was incorrect in its claim that the USgovernment official's statement demonstrated that the Gasoline Rule had a protectionist purpose.The statement in question actually reflected the US government's commitment when it issued thefinal Gasoline Rule to continue addressing the issue of how imports were treated, and the USgovernment's ongoing concern that environmental protection not be compromised. This statementalso showed that the government official's objective was adoption of the best environmentalprovision that was fair to all parties concerned. The United States equally rejected Venezuela andBrazil's argument that the 1994 Proposal implied recognition that the Gasoline Rule discriminatedagainst imports. The 1994 Proposal was a continuation of EPA's prior attempts to developcriteria that would protect the environment, minimize disruption to producers, and treat similarlysituated parties alike. The fact that EPA was willing to make this attempt was neither adetermination that the Gasoline Rule was flawed nor a determination that the 1994 Proposal wasfeasible. This proposal received largely negative public comment and was rejected in the end,including by Venezuela. PDVSA itself had objected that the proposed conditions related togasoline tracking were basically unworkable.

3.21 The United States disagreed with Venezuela's claim about decreased imports. Data fromthe US Energy Information Administration showed that current import volumes had notsignificantly decreased from historical levels. Furthermore, import volume and domesticproduction fluctuated greatly depending on market conditions, irrespective of US regulatoryaction. More specifically, Venezuela's share of the US import market rose from 11.5 to18.5 percent in the first five months of 1995 compared to the same period in 1994. Regarding theclaim by Venezuela that the Gasoline Rule had obliged its refineries to make burdensomeinvestments, the United States noted that it was impossible to judge to what extent PDVSA'sinvestments were made in reaction to regulations, such as the Gasoline Rule, in force in anyparticular export market. If, however, PDVSA's investments were related to the Gasoline Rule,they were more likely due to the need to comply with the Complex Model starting in 1998 than tothe 1995-1998 non-degradation requirements' programme. With respect to compliance with theSimple Model requirements, the United States considered that PDVSA could upgrade the portionof its gasoline output sent to the United States by simply adding to it additives such as oxygenates.In addition, the amount of complying gasoline that could be produced, or the cost of producing it,was highly dependent on the fraction of gasoline made to meet a particular specification. While adomestic refiner had to produce all its gasoline output within certain limits, foreign refinerstypically produced only a small fraction of their gasoline output for the US market. Thus foreignrefiners also had the flexibility to select their cleanest blendstocks for the US market. Suchapproaches did not require refinery modifications. There was no reason that Brazil could notadjust in the same manner to the Simple Model requirements. The United States also noted thatreported internal turmoil in Brazil's refining sector, a month-long strike beginning in November1994, and apparently recurring labour problems this year suggested that Brazil's decreased exportsto the United States could hardly be attributed to US regulations.

3.22 Venezuela agreed with the United States that Article III applied to imported gasoline andnot to the foreign refiners. The Gasoline Rule discriminated against imported gasoline byapplying the statutory baseline to such gasoline while applying individual baselines to US gasoline.

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The United States wrongly introduced the concept of "similarly situated parties" as a basis forarguing that imported gasoline and US produced gasoline were not "like product". Imported anddomestic gasolines had the same tariff classification, served the same end use and the same endusers and were indistinguishable from the commercial standpoint; thus, all gasoline was a likeproduct. The concept "similarly situated parties" was new to GATT and lacked a legal basis.Moreover, Venezuela considered that these parties were not "similarly situated". Importers, whoobtained finished gasoline for distribution to other wholesalers or retailers were not "similarlysituated" to blenders, who produced gasoline by mixing gasoline components produced by others.It was more appropriate to compare them to "jobbers" who obtained finished gasoline fordistribution to other wholesalers or retailers and who used the individual baselines associated withthe gasoline they acquired. Foreign refiners were "similarly situated parties" with respect to USrefiners in that the reasons given by the United States as to why US refiners can establish theirown baselines apply equally to foreign refiners.

3.23 Venezuela argued that the United States did not deny the existence of differential treatmentfor imported gasoline. Thus, it had to assume the burden of proving that such treatment was noless favourable to the imported product. According to past panel reports, the test was not whetherthe rules were different but whether such differences accorded no less favourable treatment toimported products. Venezuela considered that such a demonstration had not been made.Venezuela disagreed with the interpretation given by the United States to the panel report"United States - Section 337 of the Tariff Act of 1930" and considered that panels interpreted thewords "treatment no less favourable" contained in Article III:4 as calling for effective equality ofopportunities for imported products. The United States' assertion that it was "incumbent uponthe importer to balance the products of one or more foreign refiners with that of another" wascontrary to that established understanding of Article III:4. No such equality could exist if thevery ability of a producer/exporter to introduce his product into the importer's market dependedon the subsequent decisions of the importer to buy additional product produced and exported byanother person. The opportunity to import a like product could not be conditional upon theimporter's willingness to run a risk of not finding below-statutory baseline gasoline in order toaverage it with above-statutory baseline gasoline. Venezuela considered that the reasoning of twoprevious panel reports10 regarding the loss of competitive opportunities for imported products wasapplicable to this case and led to the conclusion that imported gasoline should have the samedistribution opportunities available to US produced gasoline, including the ability to be solddirectly into commerce with the application of an individual baseline.

3.24 Venezuela considered that the issue at stake was not averaging, a technique which wasalso available to domestic refiners, but the difference between the requirements imposed onimported gasoline and the requirements imposed on US gasoline. In order to regulate the averagequality of gasoline in the United States, the Gasoline Rule regulated every batch of gasolineproduced in or imported into the US. The fact that the very same gasoline with identicalcharacteristics would be treated differently under the Rule if produced by a US refiner as opposedto a foreign refiner was precisely the "less favourable treatment" prohibited under Article III:4.

3.25 Venezuela rejected the United States' assertion that a foreign refiner that producedgasoline in 1990 with properties of sulphur, olefins and T-90 above the statutory baseline only hadto mix "additives such as oxygenates" to upgrade its gasoline; in fact, the very composition of theforeign gasoline had to change. Venezuela denied the United States' claim that Venezuela hadrejected the 1994 Proposal. Venezuela had simply explained why some means by which the EPA

10"United States - Measures Affecting Alcoholic and Malt Beverages", BISD 39S/206 (adopted on 19 June 1992), and "Canada - Import,

Distribution and Sale of Certain Alcoholic Beverages", BISD 39S/27 (adopted on 18 February 1992).

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proposed to achieve certain ends were not workable from a practical standpoint, and presentedalternatives to achieve the same ends in a more practical and workable manner.

3.26 Brazil argued that the alleged benefit to imports deriving from the fact that "roughly half"of the domestic gasoline must be "cleaner" than imported gasoline (which, in Brazil's view hadnot been demonstrated) did not overcome the less favourable treatment accorded to importsderiving from the fact that "roughly half" of the domestic gasoline was permitted to be "dirtier"than imported gasoline. This statement by the United States implicitly admitted the discriminationcontained in the Gasoline Rule which required imported gasoline to be cleaner than half of thedomestically produced gasoline. Brazil noted that a previous panel report had rejected any notionof balancing more favourable treatment of some imported products against less favourabletreatment of other imported products11. The same rationale applied to any notion of balancingmore favourable treatment vis-à-vis some domestic products against less favourable treatment vis-à-vis other domestic products. Similarly, another panel report12 had concluded that the exposureof a particular imported product to a risk of discrimination constituted, by itself, a form ofdiscrimination. The Gasoline Rule exposed all imports to less favourable treatment than thetreatment accorded to what the United States had described as "roughly half" of the domesticproduction. Thus, in this dispute as in previous disputes, the panel should reject the notion of"balancing". Brazil further argued that the United States had not in any event demonstrated thatthe average of the individual baselines was equivalent to the statutory baseline. Domestic refinerswere allowed to use post 1990 (Method 3) data to establish their individual baselines whereas thestatutory baseline was presumably established based on actual 1990 data. This contradicted theUS argument that importers were subject to an overall average standard which was equivalent tothat imposed on domestic refiners because baselines based on data from different time periodscould not be considered to be equivalent.

3.27 Brazil argued that United States' reference to the "Section 337" panel report was irrelevantsince it had not demonstrated in this particular case that the application of formally identical legalprovisions would in practice accord less favourable treatment to imported products. The UnitedStates only "believed" that granting individual baselines to foreign refiners would disadvantagethem. Similarly, the United States had not demonstrated why US importers would not be able toestablish an individual baseline following Method 3, based on post-1990 gasoline blendstock, sinceaccording to the United States, importers were blenders and used blendstocks. Finally, thecomparison made by the United States between a foreign refiner and a US importer wasinaccurate, for a foreign refiner had to be compared with a US domestic refiner.

3.28 Brazil rejected the argument that imported gasoline was treated similarly to gasoline fromsimilarly situated parties. Imported gasoline produced by foreign refiners who had unlimitedoperations in 1990 was treated like gasoline produced by blenders and domestic refiners who hadlimited operations in 1990, whereas it should have been treated like gasoline produced bycomparable US domestic refiners. Brazil further noted that most US blenders who were notdomestic refiners were in fact importers, and hence should not, as argued by the United States, beconsidered as two separate categories. Thus, discriminating between domestic refiners anddomestic importers in practice resulted in discriminating against imports. Moreover, the fact thatdomestic refiners were allowed to import blendstock, mix it with their own production andmeasure the compliance of the final product against their individual baseline, whereas neitherblenders nor importers were allowed to do this with respect to their own blendstock, showed thatthe system did not treat like products in a similar way.

11"United States - Section 337 of the Tariff Act of 1930", BISD 36S/345, (adopted on 7 November 1989).

12"EEC - Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins", BISD 37S/86

(adopted on 25 January 1990).

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3.29 Brazil agreed with the United States that Article III applied to gasoline and not to theproducer of gasoline. In this particular case, the standard applied to gasoline had been determinedwith reference to the producer of gasoline. Brazil was not questioning this policy choice as such,but the fact that a different and less favourable standard applied to imported products. In the caseof Brazil, this discrimination was illustrated by the fact that the gasoline exported by Brazil as"finished" conventional gasoline until 1 January 1995 was now considered as a mere "blendstock"because it did not meet the statutory baseline requirements. Blendstock gasoline commanded alower price because the buyer had to mix it with "cleaner" gasoline in order to comply with thestatutory baseline. In conclusion, Brazil stated that the fact that the product produced by aBrazilian refiner could not be sold in the United States as finished gasoline while the identicalproduct produced by a US refiner complying with its individual baseline could be sold as finishedgasoline constituted precisely the less favourable, discriminatory treatment Article III was intendedto prohibit.

3.30 The United States argued that the complainants improperly focused on developing foreignrefinery baselines, and had not demonstrated how foreign refiners could accurately ascertain thequality of the subset of their total gasoline production exported to the United States, even if theywere able to establish the quality of their total 1990 output by using Methods 1, 2 or 3. Evenassuming that this problem could be overcome by Venezuela and Brazil, it remained for otherforeign refiners. By focusing on foreign refiners' baselines rather than on the more logicalestablishment of importers' baselines, the complainants appeared to seek a commercial advantagefor their national oil companies over other foreign gasoline suppliers. This could favour thoseimporters who had commercial ties to such refiners over others, and thereby distort competitiveconditions among importers. The General Agreement did not require the United States to accordrights on foreign soil to foreign refiners, as opposed to WTO Members, especially if issuesrelating to imports could better be addressed through regulating importers who were located onUS territory.

3.31 The United States further argued that the references made by Venezuela to previous panelreports were irrelevant because the situation currently under examination was different. Thequestion posed to this Panel was not whether imports and domestic products were treatedidentically (the United States recognized that it was not the case), but whether that treatment wasless favourable under Article III. Given the fact that, for the reasons stated above, an identicaltreatment would have precluded most importers from marketing gasoline in the United States, thespecific provisions applying to imports did not violate Article III. The United States also rejectedBrazil's claim that blenders were in fact importers and maintained that they did fall into twodifferent categories, even if similarly situated in other respects. (Of the registered entities thatwere blenders or importers, over a third were solely blenders and over a third were solelyimporters.) The United States considered that the difficulties supposedly experienced byVenezuela and Brazil to export gasoline to the US market were groundless. Firstly, importerscould easily find large amounts of gasoline with low levels of sulphur and olefin, thus "offsetting"Venezuela's high sulphur and olefin content, because of the typical configurations of refineriesoutside of the United States. This was evidenced by the clean imports of reformulated gasolinethis year and by the fact that 1995 exports from Venezuela did not reflect an identifiable impact ofthe Gasoline Rule. Secondly, Brazil's choice not to export finished gasoline, but to exportblendstock instead, was unrelated to US environmental regulations since the Gasoline Rule did notcontain any requirements as to whether importers imported gasoline on the one hand, orblendstock on the other. The conventional and reformulated gasoline requirements did not aim atestablishing whether a product was or was not gasoline. Rather, to be sold as "gasoline",commercial contracts generally required a product to meet certain standards established by theAmerican Society of Testing and Materials. Regarding the alleged reduced export volumes fromthe complainants, the United States noted that import levels in a given market were generally

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sensitive to various factors (US demand, exporting country's supply and demand, refinery coststructure, gasoline market conditions in other competing exporting countries, for instance), andthat worldwide exports of gasoline to the United States had been following a downward trend overthe last five years. It was equally difficult to know the exact role played by the Gasoline Rulewith regard to the investment programme of Venezuelan refineries since any refiner operating atthe world level needed a significant reformer capacity. Venezuela's investment in such a reformerunit likely reflected overall Venezuelan market strategy. Moreover, whatever productionlimitations PDVSA might have with respect to one particular refiner, blending of feedstock fromseveral refineries made higher levels of statutory-quality gasoline on a per-shipment basis possible.In addition, the US government had studied refinery cost structure shortly after passage of theClean Air Act and found that refiners whose production of reformulated gasoline was about 30%or less of their total gasoline production could produce the reformulated gasoline at little or noincremental cost (i.e. investment costs) because of their ability to select among blendstocks.

3.32 The United States argued that, with respect to the particular baseline to be employed bydomestic refiners that import, the Rule's requirement that refiners use their own baselines appliedonly to conventional gasoline, and up to the volume that the refiner imported in 1990. Thepurpose of the provision was to prevent a domestic refiner with a baseline more stringent that thestatutory baseline from avoiding that stringent baseline by exporting gasoline produced at thedomestic refinery and then reimporting that same gasoline under the statutory baseline, a concernraised to EPA in public comments.

3.33 Venezuela argued it was not focusing on foreign refiners but on the situation of importedgasoline. The foreign refiner had become an issue only because the characteristics ofUS produced gasoline set by the Gasoline Rule was determined, in large part, by the historicalquality levels of the individual US producers. Venezuela considered that it was misleading toengage, as the United States did, in a discussion of the relative situation of importers and domesticrefiners when comparing the respective treatment of domestic and imported products. The focusof the analysis had to remain on gasoline as a product. The previous panel cases cited byVenezuela were relevant because the situations were similar. Venezuela disagreed with the UnitedStates' argument that importers could easily obtain suitable offsetting gasoline for Venezuela'sgasoline quality. The data presented by the United States to the Panel regarding the properties ofgasoline imported in 1995 suggested exactly the contrary: by showing that the maximum valuesof sulphur, olefins and T-90 of imported gasoline were essentially at the statutory baseline, thesedata confirmed that above-statutory foreign gasoline was not purchased by US importers. Thus,foreign refiners were effectively obliged to comply with the statutory baseline requirements if theywanted to sell gasoline in the United States.

b) Article III:1

3.34 Venezuela and Brazil claimed that discriminatory baseline requirements contained in theGasoline Rule violated Article III:1 for the same reasons they violated Article III:4. By distortingthe conditions of competition for foreign gasoline, both reformulated and conventional, they wereapplied "so as to afford protection to domestic production". Venezuela also noted thatArticle III:1 was a more general provision than Article III:4. Thus, it would not insist on thepanel ruling on Article III:1 if the Panel found the Gasoline Rule to be inconsistent withArticle III:4.

3.35 The United States replied that, for the reasons expressed under Article III:4, the GasolineRule did not afford protection to domestic production. Furthermore, since Article III:1 had byitself only an exhortatory character, it was not amenable to a finding of "violation" in a disputesettlement proceeding. A Panel had never found an independent violation of Article III:1.

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3.36 Brazil argued that previous disputes13, to which the United States had been a party,involved a violation of Article III:1.

3. Article XX - General Exceptions

3.37 The United States argued that the Gasoline Rule fell within the scope of Article XXwhether or not it was consistent with other provisions of the General Agreement. Not allmeasures described by Article XX were inconsistent with the General Agreement. However, ifthe Panel accepted that the Gasoline Rule was consistent with other provisions of the GeneralAgreement, in particular Article III, it did not need to decide whether the measures at issue alsofell under Article XX. Article XX guaranteed in any event that these measures were notinconsistent with the General Agreement.

3.38 Venezuela and Brazil considered that the issue at stake under Article XX was not whetherthe CAA or the regulations implementing it were necessary, but whether it was necessary toaccord foreign gasoline less favourable treatment , which, they argued, was the situation in thiscase. Venezuela argued further that Article XX provided limited and conditional exceptions fromobligations under other provisions of the General Agreement, and the burden was on the partyinvoking that provision to justify the application of any of the enumerated exceptions. The UnitedStates lacked the factual and legal support necessary to carry that burden with respect to any of itsclaims under Article XX.

4. Article XX(b)

a) "Protection of Human, Animal and Plant Life or Health"

3.39 The United States argued that it was well established that air pollution, and in particularground-level ozone, presented health risks to humans, animal and plants. Toxic air pollution wasa cause of cancer, birth defects, damage to the brain or other parts of the nervous system,reproductive disorders and genetic mutation. It could affect not only people with impairedrespiratory systems, but healthy adults and children as well. Ozone was also responsible foragricultural crop yield loss in the United States. Vehicular air toxic emissions accounted forapproximately 40 to 50 percent of total air toxic emissions. The Gasoline Rule provisions soughtto control toxic air pollution from mobile sources by addressing the fuel that creates theseemissions. Thus, its aim was to protect public health and welfare by reducing emissions of toxicpollutants, VOCs and NOx for reformulated gasoline, and to avoid degradation of air quality foremissions of NOx and toxic air pollutants for conventional gasoline. Therefore, the GasolineRule fell within the range of policies specified in Article XX(b).

b) "Necessary"

3.40 The United States argued that the non-degradation requirements for both reformulated andconventional gasoline were necessary to protect human, animal and plant life or health. Usingindividual baselines for conventional gasoline was the quickest and fairest way to achieve theprogramme's environmental goal, which was to ensure the maintenance of US 1990 gasolinequality in the cleaner areas without affecting the speedy and cost-effective implementation of thereformulated gasoline programme in the most polluted areas, and without causing majordisruptions in the domestic production of conventional gasoline. If a single baseline were used forall conventional gasoline, then all producers whose gasoline was dirtier than this baseline for

13"Canada - Administration of the Foreign Investment Review Act", BISD 30S/140 (adopted on 7 February 1984) and United States -

Measures Affecting Alcoholic and Malt Beverages" BISD 39S/206 (adopted on 19 June 1992).

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certain gasoline qualities would need to change the characteristics of their production to meet thestandard for those qualities, and those producers whose gasoline was cleaner than the baselinecould degrade down to the baseline. The result would be the same overall average for gasoline,but large segments of gasoline producers would have been required to make changes to theirconventional gasoline production. Where future production exceeded their 1990 output, refinersmust meet the statutory baseline. With respect to reformulated gasoline, individual baselines wereused for a three year transition period and applied to three gasoline qualities -sulphur, olefin andT-90- which were required to preserve their average US 1990 levels because EPA lacked dataabout their precise emission effects. This approach avoided requiring large segments of producersto make changes in their gasoline in order to meet a single requirement, whereas it was not clearwhether and how any such change was needed to avoid emissions increases. However, allreformulated gasoline refiners must have begun to adjust their operations in order to meet the newreformulated gasoline requirements that would be in effect in 1998 under the Complex Model.All regulated gasoline qualities would then be measured against the statutory baseline. Thus, thebaseline system protected air quality in the most practical and cost-effective manner, while takingthe best account of the various producers' characteristics.

3.41 The United States argued that the individual baseline approach was however not possiblewith all producers, in particular, refiners that were only producing during part of 1990, blendersand importers. These categories of producers were in a different situation since they lacked thedata necessary to use Methods 1, 2 and 3, and requiring them to establish an individual baseline,like domestic refiners, would have had the effect of precluding them from the US market. Thus,assigning importers to the statutory baseline ensured that they would not be forced out of themarket while treating similarly situated parties alike. Moreover, even if in some cases importersmight be able to establish individual baselines derived from foreign refiner information, givingimporters a choice as to which baseline to use would inevitably have undermined the air qualityobjective of the regulation since business incentives would have induced them to use the cheapestand least stringent option, which would also have been the most polluting one. Taking intoaccount these concerns over gaming, EPA had determined that no other option was feasiblewithout having adverse effects on trade. The United States stressed that the Gasoline Rule appliedto the importer and not to the foreign refiner. Given that there had traditionally been a variety ofgasoline and blendstock qualities available on the market, importers were likely to have theflexibility to import gasoline from various sources, some with levels above and others below thestatutory baseline, as long as the annual average for the importer met the statutory baseline.

3.42 The United States argued that it was not feasible to give individual baselines to foreignrefiners for various reasons. First, gasoline was a fungible international commodity and ashipment of gasoline arriving in a US port generally contained a mixture of gasoline that had beenproduced at several foreign refineries. Therefore it would be very difficult, if not impossible, todetermine the refinery of origin of a shipment of gasoline for the purpose of establishing anindividual baseline. Second, the difficulty of identifying the refinery of origin would also favourpotential gaming of the system since the foreign refiner could be tempted to claim the refinery oforigin for each shipment of imported gasoline that would present the most benefits in terms of thebaseline restrictions. The third reason related to the difficulties of the United States to exerciseenforcement jurisdiction over foreign refiners. The Gasoline Rule could not be enforced simplyby examining the product at the border but required EPA to audit the facilities of refineries inorder to verify, inter alia, that the data provided to establish the individual baselines wereaccurate as well as to ensure future compliance. EPA also needed other enforcement tools such ascriminal penalties, civil enforcement proceedings or court warrants, that would not be readilyavailable to use outside US territory against a refinery located on foreign soil. Holding theimporter accountable for the conduct of the foreign refiner with whom he has not colluded couldhave been an unfair solution. The United States recalled that the panel report "United States -

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Section 337 of the Tariff Act of 1930" had acknowledged that a measure might need to provideapparently less favourable treatment to imports in situations where it "might be considerably moredifficult to identify the source of infringing products or to prevent circumvention of orders limitedto the products of named persons"14, than for US products. The present case offered similardifferences in enforcement needs and capabilities with respect to the identification of the source ofgasoline.

3.43 The United States disagreed with Venezuela's assertion that the May 1994 Proposaldemonstrated the feasibility of individual baselines for foreign refiners. This Proposal was acontinuation of EPA's efforts to develop criteria that would protect the environment, minimizedisruption to producers and treat similarly situated gasoline alike, taking into account thecomments and concerns expressed by interested parties. The fact that EPA made this attempt wasneither a determination that the Gasoline Rule was flawed nor a determination that the 1994Proposal was feasible. The 1994 Proposal contained several strict conditions governing theestablishment of individual baselines for foreign refiners, which showed that concerns still existed.Moreover, it applied only to reformulated gasoline because the indefinite application of individualbaselines for conventional gasoline and the expectation that many more foreign refiners wouldsupply the conventional market indicated that the environmental risk associated with allowing thisoption were too great to justify even its proposal. In public comments, the 1994 Proposal hadbeen criticised as favouring a small group of importers over all the others. PDVSA and otherforeign refiners had objected that the proposed conditions, inter alia those related to gasolinetracking, were unworkable. For these reasons, the United States rejected Venezuela's assertionthat EPA would have finalized this Proposal except for the action by Congress.

3.44 The United States considered that Venezuela's citation of the testimony of a USgovernment official was inapposite. This testimony reflected the US government's commitmentwhen it issued the final Gasoline Rule to continue addressing the issue of how imports weretreated together with the concerns that environmental protection not be compromised and that theprovisions be fair to all the parties affected. Contrary to Venezuela's argument, this testimony didnot show that protectionism underlay the Gasoline Rule's treatment of imports. The statement ofa US government official defending the proposed use of foreign refiner baselines only illustratedthat US regulators wished to obtain a mutually satisfactory solution with Venezuela. Moreover,the Rule explicitly stated that its motivation was environmental protection, not protectionism.

3.45 Venezuela argued that Article XX(b) was not applicable because the United States had notdemonstrated that there were no less trade-restrictive means to achieve its health policy objectives.The Gasoline Rule's discriminatory baseline requirements were not, therefore, "necessary" withinthe terms of Article XX(b). Venezuela considered that there were less trade-restrictivealternatives to the Gasoline Rule discriminatory baseline requirements that would achieve the sameobjective. One such alternative was to authorize the use of individual baselines by foreign refinersfor both reformulated and conventional gasoline. Another alternative was to require all USgasoline producers to meet the statutory baseline requirements. A third alternative, in Venezuela'sview, would have been to enforce the Complex Model as of 1995, rather than 1998, so as to treatboth US and imported reformulated gasoline equally from the beginning. A fourth alternativewould have been to authorize the use of foreign refiner individual baselines and, if compensatingemissions reductions were necessary, to spread the burden of such compensation equally across allgasoline, US and imported alike.

14BISD 36S/345, § 5.32, adopted 7 November 1989.

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3.46 Venezuela considered that, contrary to the US argument, the use of a foreign refinerbaseline was feasible. It was feasible for a foreign refiner to develop an individual baseline,relying on the same types of records and data as US domestic refiners. In the case of Venezuela,PDVSA had all the records necessary to accurately determine an individual baseline in conformitywith the requirements applicable to the US refiners, as had been confirmed by the firmTurner, Mason and Co. which served as an independent, EPA-approved auditor. The foreignrefiner's individual baseline would be submitted to EPA for approval and to correct any possiblemistakes before the product could be imported into the United States. EPA could then require aforeign refiner, as a requirement for establishing and maintaining its individual baseline, to appearbefore the agency and/or to make available to it production records and any other reasonableinformation aimed at ensuring the accuracy of the baseline. Then, enforcement would only berelevant in verifying the characteristics of gasoline as it entered the United States. This kind ofverification was routinely performed on many types of imported products and, in the case ofgasoline, compliance for each shipment could be determined at the port of entry by testing theshipment and comparing its fuel properties with the individual baseline of the foreign refiner.Furthermore, since the importer was currently liable towards EPA for gasoline that did notconform to the statutory baseline, it was similarly possible to make him liable for gasoline that didnot conform to the foreign refiner's individual baseline. Under US customs law, precedentsexisted where an importer was liable for an imported product that did not meet certain standards,and subject to civil and criminal sanctions. Venezuela cited, inter alia, the case of importersbeing liable for products not meeting the safety standards promulgated by the Consumer ProductSafety Commission. This demonstrated that United States' concerns about enforcementmechanisms outside its territory and importer's liability for the conduct of a foreign companywere without merit. Venezuela rejected the argument that it was not possible to determine therefinery of origin and noted that during the consultations leading to the 1994 Proposal, PDVSAhad suggested several alternatives to deal with this problem. Moreover, the concerns expressedby the United States about foreign gasoline being mixed with "dirty" gasoline before beingimported into the United States should apply equally to US produced gasoline being degraded afterit left a US refinery. Venezuela also strongly denied the assertion that it had rejected the 1994Proposal since it had clearly supported EPA's proposal to allow foreign refiners to establish theirindividual baselines and had continued to work with EPA to that end, presenting alternatives andexplaining why particular provisions of the Proposal were unnecessarily burdensome andunworkable.

3.47 Lastly, Venezuela argued that United States' concern about "gaming", which was based onthe assumption that foreign refiners with "cleaner" gasoline would select the statutory baselinerather than establishing their own baseline, thus affecting the air quality, was purely speculativefor several reasons. EPA had itself recognised that it did not have data about the average qualityof gasoline imported in 1990, and thus could not know whether a significant amount of thatgasoline imported was "cleaner" than the statutory baseline. Available data indicated that foreignrefiners were not likely to "degrade" from their 1990 gasoline quality and the impact of any suchactivity would at most be de minimis. Moreover, US statistics showed that, from January toMarch 1995, imported gasoline represented less than two percent of total US gasolineconsumption. Thus, even accepting (which Venezuela did not) the United States' argument thathalf of the foreign refiners produced gasoline in 1990 that was below the statutory baseline andhalf of the foreign refiners produced gasoline that was above the statutory baseline, possibilitiesfor gaming would arise for less than one percent of total US gasoline consumption. The practicalimpact of gaming was too small to justify discrimination against imported gasoline underArticle XX(b). Finally, several aspects of the Gasoline Rule are incompatible with the professedUS concern regarding the possible environmental impact of potential "gaming" : for example, thefact that there was no limitation on the volume of reformulated gasoline a US refiner couldproduce under its individual baseline, or the fact that in a particular geographical area, the

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emissions from gasoline would vary, depending on which refiners were supplying it, and as aconsequence, the emissions levels could exceed the statutory baseline. Moreover, EPA hadrecently proposed several amendments to the Gasoline Rule, such as provisions permitting upwardadjustment in baseline levels because of a US refiner's inability to acquire low sulphur contentcrude oil that was available in 1990, which equally undermined its environmental objectives.Venezuela concluded that the United States had not met the burden of the proof required byArticle XX.

3.48 Brazil did not disagree with the purpose of the United States which was to address theproblem of air pollution in order to protect human, animal and plant life and health. However,Brazil considered that the Gasoline Rule programme did not satisfy the requirements ofArticle XX(b), because the burden of achieving this purpose was placed disproportionately onimported gasoline. All imported gasoline had to meet the 1990 average expressed in the statutorybaseline whereas half of the domestic refineries could sell gasoline which did not meet thestatutory baseline. The concerns expressed by the United States about the negative impact ofimposing a single statutory baseline on domestic refiners could not justify a violation to thenational treatment obligation for the following two reasons. First, EPA did not want to impose ondomestic refiners whose gasoline was dirtier than the statutory baseline the burden of changingtheir production characteristics, but it imposed precisely this requirement on foreign refiners.Secondly, the United States had not demonstrated to the Panel why domestic refiners whoseproduction was cleaner than the statutory baseline would downgrade to the baseline. And evenassuming that such a downgrade would occur, the overall air quality would not change as long asthe refiners with "dirtier" gasoline were required to upgrade to the statutory baseline. Brazilconsidered that a rule establishing the statutory baseline as a minimum with the additionalrequirement that those refiners who produced gasoline above the statutory baseline continue to doso was another option which would take care of the downgrading concern while at the same timeimproving air quality in the United States and eliminating discrimination against imports.

3.49 Brazil further argued that the United States had not explained why importers could notestablish an individual baseline, especially using Method 3 since importers presumably maintainedrecords of their imports and thus could have data on their 1990 imports. Even assuming that itwas necessary to assign importers to the statutory baseline, this did not explain the failure toprovide for individual baselines for foreign refiners. Brazil considered that the United States hadnot demonstrated that foreign refiners did not have sufficient data to establish their own baselines.In that context, the United States referred only to "difficulties" but, according to Brazil, mere"difficulties" did not create necessity within the meaning of Article XX(b). Moreover, assumingthat these difficulties were insurmountable, they would nevertheless not allow the United States todiscriminate against foreign gasoline since there was an alternative measure, reasonably available,which was the requirement that all gasoline, domestically produced and imported, meet the samestatutory baseline, as Brazil had noted above.

3.50 Brazil considered that the United States had presented no factual basis to support itsconcern that a foreign refiner would "game" the system if given the choice between the statutoryand the individual baseline. Besides, this opportunity for "gaming" could be eliminated by simplyassigning all refiners, domestic or foreign, to the same baseline, statutory or individual.Regarding the use of individual baselines by foreign refiners, the United States had never madeany attempts to investigate or determine empirically whether the calculation and enforcement ofsuch baselines were possible. However it merely insisted that these problems wereinsurmountable and, therefore, the statutory baseline had to be applied to imported gasoline.Finally, the fact that numerous parties had objected to particular aspects of the 1994 Proposal didnot mean that non-discriminatory baselines for foreign refiners were not possible. Brazil

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concluded that the United States had not demonstrated why it was not possible to permit foreignrefiners of both conventional and reformulated gasoline to use their own baselines.

3.51 Brazil argued that the discrimination under the General Agreement or the TBT Agreementwas not justifiable even assuming that the use of foreign refiners' individual baselines wasimpossible. If it were impossible to assign individual baselines to foreign refiners, the UnitedStates would then be justified in using individual baselines for domestic refiners only if no other,non-discriminatory measure were available. A WTO Member was not permitted to review severaloptions, select one in which discrimination was unavoidable, and then plead that the selectedoption required discrimination. Under Article III of the General Agreement -but also underArticle I of the General Agreement and Article 2 of the TBT Agreement- a WTO Member wasobliged, when the policy option involved discrimination, to choose another option when one wasavailable. In this particular case, there was such an available alternative, which was to apply thestatutory baseline to all producers of gasoline.

3.52 The United States maintained its arguments regarding the impraticability of foreignrefiner's baseline. It argued that compliance with requirements based on foreign refinerybaselines could not be established only by sampling gasoline on its arrival at a US port of entry,because it would be necessary to determine the refinery of origin for such imported gasoline.This type of determination would be difficult, if not impossible, due to the fungible mixing ofgasoline that occurs before arrival in a US port of entry. The enforcement provisions of other USstatutes cited by Venezuela to negate this concern were inapposite, because those statutes allinvolved matters that could be resolved by inspection of the product by Customs officials at theborder. The United States also noted that there was no analogous concern with identifying thesource of gasoline produced at domestic refineries, because domestic gasoline was regulated at therefinery gate, which left no questions of which refinery produced any particular batch of gasoline.The United States further argued that the potential environmental effect of "gaming" could be,under a reasonable scenario, an annual increase in NOx emissions from imported gasoline by 5.6to 7 percent (about 115,000 short tons). US analyses of foreign refinery configurations showedthat because of low fluid catalyst unit capacity among foreign refiners, sulphur and olefin levels inimports were likely to be low compared to the US statutory baseline, thus leaving ample room forgaming and degradation. Moreover, the "gaming" incentives for foreign "cleaner" refiners werenot hypothetical: various changes since 1990 in physical plants and operating procedures couldchange the economic calculus for producing gasoline of a specified quantity, and the quality of thecrude used in refining could change. In these conditions, a refiner might choose to degrade thesulphur, T-90 or other characteristics if it proved to be economical. The United Statesemphasized that there were no regulatory requirements on foreign refiners, who had ampleflexibility, not available to domestic refiners, to select among blendstocks. The United Statesconcluded that, contrary to Venezuela's and Brazil's claim, Article XX did not require adoption ofthe statutory baseline as a national standard even if the difficulties associated with theestablishment of individual baselines for importers were insurmountable. Application of thestatutory baseline to domestic producers of reformulated and conventional gasoline in 1995 wouldhave been physically and financially impossible because of the magnitude of the changes requiredin almost all US refineries; it thus would have caused a substantial delay in the programme.Weighing the feasibility of policy options in economic or technical terms in order to meet anenvironmental objective was a legitimate consideration, and did not, in itself, constituteprotectionism, as alleged by Venezuela and Brazil. Article XX did not require a government tochoose the most expensive possible way to regulate its environment. In the case at hand, it wasnot necessary to assign domestic refiners to the statutory baseline for the non-degradationrequirements for the reasons stated above.

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3.53 The United States argued that the lack of a volume limitation for the use of individualbaselines under the reformulated gasoline programme was not expected to affect the success ofthat program. US data showed that refineries with the highest olefin and sulphur levels in theirbaselines (i.e. the dirtiest baselines) as a group had not extended their market share after the startup of the reformulated gasoline programme. This was consistent with EPA's original expectationsthat the short time period during which individual baselines were used in the reformulatedprogramme would not provide an incentive for refiners to revise their investment and productiondecisions based on whether their baselines were above or below the statutory baseline. TheUnited States also argued that the various baseline adjustments allowed under the Gasoline Ruleeither redressed disadvantages occurring as a result of government requirements, or dealt withsituations where the US government did not have data for a full year's representative operations.

3.54 Venezuela argued that the examples posed by the United States in the attempt to show anincrease of average NOx emissions from imported gasoline because of potential gaming wereflawed, leading to exaggerated results because they had relied on the Complex Model, which wasnot in use for 1995-1997, and on the assumption that half of the imported gasoline in 1990 hadproperties below and half had properties above the statutory baseline. Regarding this lastassumption, the United States had conceded that it simply did not know the properties of the poolof imported gasoline in 1990, and had failed to present evidence that foreign refiners which mighthave exported to the United States gasoline cleaner than the statutory baseline would have anincentive to degrade down to the statutory baseline. Venezuela rejected this assumption and statedthat there was no economic incentive for a refiner to operate its refinery in a less than optimalmanner to increase the level of a fuel property such as sulphur or olefins for the sole purpose ofmaking "dirtier" gasoline.

5. Article XX(d)

3.55 The United States considered the Gasoline Rule's baseline establishment system wasnecessary to enforce the non-degradation requirements aiming at preventing deterioration of airquality. The non-degradation requirements ensuring that gasoline sold in the United States did notbecome more polluting than in 1990 were "laws or regulations which are not inconsistent with theprovisions of the General Agreement". They were measures for which, pursuant to Article XX(g)and XX(b), "nothing in [the General Agreement] shall be construed to prevent the adoption orenforcement by any contracting party". For the reasons stated under Article XX(b), the baselineestablishment rules were necessary to ensure that there was no degradation in gasoline or airquality. If importers were allowed to use several baselines, depending on which foreign refinerschose to use them, "gaming" could occur, and result in a deterioration of overall air quality.Therefore, the Gasoline Rule fell within the scope of Article XX(d).

3.56 Venezuela considered that the United States had not clearly established which were the"laws or regulations" which were not inconsistent with the General Agreement and with whichcompliance was secured, and hence had failed to demonstrate such consistency. Venezuela notedthat a previous panel had found that a measure was deemed to "secure compliance with" only if itwas effective to "enforce obligations" under laws or regulations consistent with the GeneralAgreement, as opposed to ensuring the broader attainment of an objective15. When stating that"the baseline establishment rules are necessary to ensure that there is no degradation in gasolineand air quality", the United States precisely referred to an objective, instead of identifying anyobligation of the non-degradation requirements that the discriminatory baseline requirements were

15"EEC - Regulation on Imports of Parts and Components", BISD 37S/132, para. 5.17-5.18 (adopted on 16 May 1990).

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necessary to enforce. Moreover, for the reasons expressed under Article XX(b), the GasolineRule was not necessary. Thus, the United States did not meet the requirements of Article XX(d).

3.57 Brazil considered that, for the reasons it had already developed under Article XX(b), theUnited States failed to demonstrate that the Gasoline Rule was "necessary" to secure compliancewith the Clean Air Act, within the meaning of Article XX(d). As Brazil had previously indicated,there were non-discriminatory alternatives available to the United States.

6. Article XX(g)

3.58 The United States argued that, as a programme intended to preserve clean air, theGasoline Rule fell within the scope of Article XX(g).

a) "Related to the conservation of exhaustible natural resources..."

3.59 The United States argued that clean air was an exhaustible resource within the meaning ofArticle XX(g) since it could be exhausted by the emissions of pollutants such as VOCs, NOx andtoxics. In the most polluted areas, it could become chronically contaminated and remain so overlong periods of time. Air containing pollutants could move long distances to contaminate otherairsheds. Moreover, by stopping air degradation, the CAA also protected other exhaustiblenatural resources such as lakes, streams, parks, crops and forests, which were affected by airpollution. Thus, the objectives underlying the reformulated and conventional gasolineprogrammes fell within the range of policies to preserve both clean air and, consequently, othernatural resources.

3.60 Venezuela noted that it shared with the United States a concern for the impact of dirty airon health, but claimed that the United States' arguments regarding the applicability ofArticle XX(g) to this case were both factually and legally erroneous. Recalling past panel reports,Venezuela considered that the exceptions provided for by Article XX had to be interpretednarrowly, in a manner that preserved the basic objectives and principles of the GeneralAgreement16. Noting that the original purpose of Article XX(g) was to permit exceptions tootherwise applicable prohibitions or restrictions on the export of tradeable goods that could beexhausted as a result of their exploitation, Venezuela doubted that clean air was an exhaustiblenatural resource within the meaning of article XX(g). Venezuela considered that clean air was a"condition" of air that was renewable rather than a resource that was exhaustible, such aspetroleum and coal. There was no textual basis for expanding the scope of Article XX(g) to coverrenewable "conditions" of resources as opposed to exhaustible natural resources.

3.61 Venezuela noted that under established GATT jurisprudence, a measure "related to" theconservation of an exhaustible natural resource only if it was "primarily aimed at" conserving thatresource17. The United States had not even attempted to argue that the Gasoline Rule'sdiscriminatory requirements, which were the measure at issue in the dispute, were "primarilyaimed at" conservation, but had merely attempted to justify that the reformulated and conventionalgasoline requirements fell under Article XX(g). Furthermore, the United States had identifiedonly the protection of health as the primary objective for the reformulated and conventionalgasoline requirements, which was irrelevant to an Article XX(g) analysis. Venezuela noted that it

16"United States . Restrictions on Imports of Tuna", DS29/R, 16 June 1994 (unadopted), "Canada - Administration of the Foreign

Investment Review Act", BIDS 30S//140, para. 5.20 (adopted on 7 February 1984), "United States - Section 337 of the Tariff Act of 1930",

BISD 36S/345 (adopted on 7 November 1989).17

"Canada - Measures Affecting Exports of Unprocessed Herring and Salmon", BISD 35S/98, para. 4.6 (adopted on 22 March 1988).

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had previously demonstrated to the Panel that the Gasoline Rule methodology contained loopholeswhich undermined its own conservation objectives, thus confirming that the discriminatorybaseline system could not be "primarily aimed at" the conservation of an exhaustible naturalresource.

3.62 The United States disagreed with the claim that clean air was not an exhaustible naturalresource within the meaning of Article XX(g). The United States maintained that air wasundoubtedly a natural resource which could be exhausted if it was rendered unfit for human,animal or plant consumption. This was similar to the recognition in previous panel proceedingsthat fish were an "exhaustible natural resource" since their populations could be depleted orrendered extinct18.

b) "... made effective in conjunction with restrictions on domesticproduction or consumption"

3.63 The United States considered that the Gasoline Rule restricted domestic production ofgasoline by requiring manufacturers to limit their production of gasoline so that over the course ofthe year the average of particular components of the gasoline did not exceed certain maximumlevels. It also restricted domestic consumption by ensuring that the average of those componentsof gasoline sold did not exceed certain maximum levels.

3.64 Venezuela rejected this argument because it considered that the United States had notshown that the discriminatory baseline requirements were "primarily aimed at rendering effective"restrictions on domestic production or consumption of clean air, the "natural resource" to beconserved by the Gasoline Rule. The United States had only referred to restriction on domesticproduction and consumption of gasoline.

3.65 Brazil argued that, even assuming that clean air was an exhaustible natural resource, theGasoline Rule did not restrict domestic production or consumption of clean air. At best, theGasoline Rule sought to increase production if not consumption of clean air, not to restrict it.Moreover, neither the CAA nor the Gasoline Rule restricted in any way the quantity of gasolinethat could be produced or consumed in the United States, but merely regulated its quality. Sinceneither the production nor the consumption of air or gasoline was restricted by the CAA or theGasoline Rule, the Gasoline Rule did not fall under Article XX(g).

3.66 The United States argued that the Gasoline rule did restrict domestic consumption of cleanair through its restriction of emissions that polluted the air. This was similar to restrictionsapplied on cars in order to conserve fuel. In this case, the Gasoline Rule's application to imports- including the baseline rules- was primarily aimed at rendering effective restrictions on domesticproduction of dirty air, or conversely the consumption of clean air, through regulation of thegasoline that caused air pollution.

7. Preamble to Article XX

3.67 The United States argued that, as it had demonstrated in the discussion concerningArticle III, the Gasoline Rule applied equally to similarly situated parties. Importers and blenderswere required to meet the parameters of 1990 average US gasoline because they could notascertain the refinery of origin and the quality of the gasoline they marketed in 1990. Thisavoided the alternatives of either "gaming" problems or excluding most imported gasoline from

18"Canada - Measures Affecting Exports of Unprocessed Herring and Salmon", BISD 35S/98 (adopted on 22 March 1988) and "United

States - Prohibition of Imports of Tuna and Tuna Products from Canada, BISD 29S/91 (adopted on 22 February 1982).

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the market. Unlike domestic refiners, importers had the flexibility to rely on a variety of sourcesso as to meet an annual average quality of gasoline. Moreover, for each of the requirements,about half of US gasoline produced by domestic refiners had to be cleaner in certain respects thanthe annual average gasoline quality supplied by importers. In addition, a portion of the USgasoline market was being supplied with gasoline by domestic refiners which had to meet thestatutory baseline because their gasoline could not be presumed to have been part of the gasolinepool in 1990. But to the extent that the enforcement conditions differed between the United Statesand other countries, the "same conditions" did not prevail in the United States and in othersupplying countries. Accordingly, any differences in treatment were neither arbitrarily norunjustifiably discriminatory, but were based on valid, legitimate policy reasons.

3.68 The United States further argued that the Gasoline Rule did not constitute a disguisedrestriction on trade since its objective was to ensure no degradation from 1990 levels for emissionsand air pollutants, a health objective that had nothing to do with a restriction on trade. Theprovisions were transparent and imposed the same overall requirements, stemming from the sameobjective, on imported as on domestic gasoline. The evolution of the provisions at issuedemonstrated that treatment of imports had nothing to do with the fundamental structure of thepart of the rule that was being contested. For conventional gasoline, the CAA prescribedindividual baselines on a producer-specific basis for refiners, blenders and importer. At the timethe CAA Amendments were introduced, imports did not figure significantly in the debate, notsurprisingly in the light of their small (2 to 6 percent) share of the US gasoline market. In viewof the uncertainty of the emissions effects of these parameters irrespective of the source ofgasoline, in 1991 EPA agreed to regulate, with respect to reformulated gasoline, on the basis ofindividual baselines for the three non-degradation requirements.

3.69 Venezuela argued that the 75 % Rule which applied to only a few refineries that werehistorically determined did grant an advantage to gasoline imported by the United States fromcertain third countries, as opposed to gasoline imported from Venezuela. Thus, the Gasoline Ruleconstituted a means of arbitrary and unjustifiable discrimination between countries where the sameconditions prevailed. Referring to past panel reports19, Venezuela considered that the reference"where the same conditions prevail" did not relate to the national treatment obligations, as hadbeen argued by the United States, but only to the most-favoured-nation obligation of the GeneralAgreement. Moreover, as had been previously argued by Venezuela, the discriminatory baselinerequirements of the Gasoline Rule were not justified by environmental concerns, but intended todistort the conditions of competition in favour of US gasoline against imported gasoline. Hence,the Gasoline Rule was a disguised restriction on international trade, within the meaning of thePreamble of Article XX.

3.70 Brazil rejected the arguments given by the United States and argued that by discriminatingbetween the United States and all other countries, and by discriminating among third countriesbased upon the criteria of ownership and quantity of exports, the Gasoline Rule constituted ameans of arbitrary or unjustifiable discrimination between countries where the same conditionsprevailed. Since the discrimination of imported products was so blatant, Brazil considered that therestrictions on trade were not disguised.

19"United States - Imports of Certain Automotive Spring Assemblies", BISD 30S/107, para. 55 (adopted on 26 May 1983) and "United

States - Prohibition on Imports of Tuna and Tuna Products from Canada", BISD 29S/91, para. 4.8 (adopted on 22 February 1982).

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8. Article XXIII - Nullification and Impairment

3.71 Venezuela argued that, in addition to its violation claim under XXIII:1(a), it was makingan alternative claim of nullification and impairment under XXIII:1(b). The discriminatorybaseline requirements had resulted in shipments of approximately thirty-three thousand fewerbarrels of Venezuelan gasoline to the United States per day than would be possible absent thediscrimination. The price of Venezuelan gasoline and its share in the US market, as well as theinvestment programme for Venezuelan refineries, had also been adversely affected. Venezuelawas aware that statistical evidence of adverse trade effects was not the basis for a finding ofnullification or impairment under Article XXIII:1(b). Nevertheless, it wished to emphasize thatby so affecting trade volumes, prices received for Venezuelan gasoline, Venezuela's share in theUS market and PDVSA's investment programme, the Gasoline Rule had distorted the conditionsof competition for trade in the United States compared to the conditions reasonably expected byVenezuela under the General Agreement. Venezuela said that if the Panel found nullification orimpairment under Article XXIII:1(a), it needed not make a ruling on non-violation nullification orimpairment under Article XXIII:1(b).

3.72 In responding to other claims by Venezuela and Brazil, the United States contestedgenerally the allegation that there was any identifiable impact on 1995 Venezuelan exportsattributable to the Gasoline Rule. Venezuela's exports to the United Sates had steadily declinedover the last five years, and its decrease in exports in 1995 was entirely consistent with the earlierdecline.

C. Agreement on Technical Barriers to Trade

1. Article 2 - Preparation, Adoption and Application of TechnicalRegulations by Central Government Bodies

a) Whether or Not the Gasoline Rule is a Technical Regulation

3.73 Venezuela and Brazil submitted that the Gasoline Rule was a "document" which laid down"product characteristics" and "with which compliance was mandatory" for both conventional andreformulated gasoline. Therefore, it was a "technical regulation" within the meaning of Annex Iof the TBT Agreement.

3.74 The United States replied that the non-degradation requirements contained in the GasolineRule did not specify particular product characteristics, and therefore did not meet the TBTAgreement's definition of a "technical regulation". Shipments of gasoline of widely varyingcharacteristics could be sold by a particular entity, the only requirement being that at the end ofthe year, the average of certain of their chemical ingredients fell below certain levels. Thus, theseprovisions were requirements on companies, not on products, and compliance was measured on acompany level for importers and blenders, and on a refinery level for domestic refiners, but noton a product basis. These provisions constituted requirements on total annual sales, but were nottechnical regulations within the meaning of the TBT Agreement. Therefore, the TBT Agreementdid not apply to this dispute.

3.75 Venezuela maintained that EPA's regulation implementing the CAA through the baselinesetting mechanisms precisely established product characteristics for gasoline consumed in theUnited States and was therefore a "document which lays down product characteristics" within themeaning of the definition contained in Annex I of the TBT Agreement. Moreover, theUnited States itself admitted this fact when saying that the Rule dealt with "chemical ingredients".Venezuela was also of the view that averaging did not make any difference for the purpose of the

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TBT Agreement since any averaging techniques required examination of the properties of eachindividual gasoline shipment. Excluding from the coverage of the TBT Agreement regulationsrelying on averaging would open a gaping loophole. Under this interpretation, the obligation ofthe Agreement could be avoided by averaging. Venezuela considered that the United Stateswanted to avoid examination under the TBT Agreement in order to escape the requirementscontained in Article 2.2.

3.76 Brazil objected to the United States' argument that the Gasoline Rule was not a technicalregulation within the meaning of the TBT Agreement. Brazil considered that the language of theCAA and that of the Gasoline Rule, referred to the establishment of product standards for gasolinewhen determining the fuel properties for the statutory baseline and the individual baselines. Theseproduct standards applied to gasoline were mandatory. The fact, argued by the United States, thatno particular shipment of gasoline needed to meet any precise standards since the requirementswere measured on an annual average basis, and thus that the "product" was the annual quantity ofgasoline produced, blended, or imported, rather than each sub-unit, was irrelevant. Annualproduction in this case was simply the unit of production to which the standard was applied.Brazil noted that if the United States were correct in its assertion that the individual baselinesapplied to refiners and not to gasoline, the discrimination would then be even more apparentbecause foreign refiners had no baseline. In this case a mandatory requirement would apply onlyto imported gasoline while, under the logic of the United States, no requirement would apply todomestic gasoline, as distinct from domestic refiners. However, the enforcement and surveillancesystem provided for by EPA in the Gasoline Rule in order to regularly check the quality ofgasoline and its property at the refinery level argued in favour of a technical regulation settingforth product characteristics. Moreover, the United States' own statements to the Panelacknowledged this fact when declaring that the "requirements" of the Gasoline Rule were"necessary to protect human, animal and plant life or health". In conclusion, Brazil consideredthat a rule which obliged imported gasoline that did not meet the statutory baseline to be blendedwith gasoline that exceeded these requirements in order to meet the mandatory statutoryrequirements was a "document" with mandatory product characteristics.

3.77 The United States argued that the TBT Agreement had been designed to elaborate on thedisciplines of Article III of the General Agreement for a very specific subset of measures(technical regulations, standards and conformity assessment procedures). The fact that a measurewas in writing, mandatory and applied to products did not make it a technical regulation. Excisetaxes, for instance, met all these criteria but were not "technical regulations". Similarly, the term"technical regulation" was not so broad as to cover all government regulatory actions affectingproducts. For example, government regulations requiring factory smokestacks to have devices toreduce emissions were not technical regulations, though they were in writing, mandatory andspecified "characteristics". Contrary to what was argued by the complainants, there were nominimum or maximum content or emissions requirements applied with respect to the non-degradation requirements for individual shipments of either reformulated or conventional gasolineunder the Simple Model. A shipment or even sale of gasoline was not required to meet specificproduct characteristics with respect to the non-degradation requirements at issue. The GasolineRule was not setting uniform criteria in terms of gasoline characteristics; standardization wasneither the purpose nor the result of the regulation. The United States concluded that thecomplainants were interpreting the term "technical regulation" out of context and such aninterpretation, if accepted, would introduce into the TBT Agreement many measures which werein fact not intended to be covered. The United States also argued that Brazil's view that a"product" in this case be defined as an entire year's production, rather than a shipment or a batch,would be a radical departure from the concept of "product" under the WTO and was without basisin the WTO.

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b) Article 2.1

3.78 Venezuela argued that Article 2.1 of the TBT Agreement incorporated the obligations ofnational treatment and MFN set forth in Articles III and I of the General Agreement. Venezuelaand Brazil argued that, as a technical regulation within the meaning of the TBT Agreement, theGasoline Rule laid down product characteristics for imported Venezuelan and Brazilian gasolinethat gave less favourable treatment than that provided to imports from certain third countries andto US gasoline. Thus, it violated the obligations of national treatment and MFN treatmentcontained in Article 2.1 of the TBT Agreement.

c) Article 2.2

3.79 Venezuela and Brazil claimed that the Gasoline Rule created unnecessary obstacles tointernational trade in violation of Article 2.2 of the TBT Agreement.

3.80 Venezuela considered that the Gasoline Rule violated Article 2.2 for two reasons. First,there was evidence that this Rule had been "prepared, adopted or applied with a view to ...creating obstacles to international trade". The United States did not intend to discriminate againstimported gasoline when it initiated the regulatory process. However, crucial decisions involvingthe specific discriminatory aspects of the Rule were knowingly made both during the regulatoryprocess and thereafter. The testimony under oath made in April 1994 by a government official tothe United States Senate was evidence that the discrimination was intentionally adopted as a meansof affording protection to gasoline produced in the United States.

3.81 Second, the Gasoline Rule had the effect of creating an unnecessary obstacle tointernational trade because the more stringent requirements imposed on imported gasoline werenot necessary to fulfil the stated objective of the Rule which is to improve air quality in the UnitedStates. In this respect, Venezuela considered that Article 2.2 of the TBT Agreement providedgreater guidance with respect to the concept of "necessity" than Article XX of the GeneralAgreement, especially its second sentence which expressly calls for a certain balance. Article XXspoke only of measures that are "necessary", which had been in previous cases strictly interpretedto mean that a measure is not necessary if it is not the least trade-restrictive measure reasonablyavailable20. As explained in relation of Article XX(b), the Gasoline Rule clearly pursued a trade-restrictive approach despite the fact that alternatives consistent with the General Agreement wereavailable, while the risks of non-fulfilment of any legitimate objective had been deliberatelyexaggerated. EPA itself had acknowledged that less trade-restrictive alternatives of achieving theair quality objective were possible and the 1994 Proposal, though not entirely consistent with theGeneral Agreement, was one such alternative.

3.82 Venezuela further considered that the risks of non-fulfilment of a legitimate objective hadto be assessed against "scientific and technical information" which, in the case at hand, had neverbeen provided despite various requests made by Venezuela, in particular under Article 2.5 of theTBT Agreement. Article 2.2 of the TBT Agreement required that the trade-restrictive elements ofa technical regulation be eliminated unless "scientific and technical information" or other reliablefactual data demonstrate that those elements were necessary to fulfil a legitimate objective. TheUnited States had never submitted scientific evidence or technical data demonstrating that thedifferent baseline requirements were necessary to fulfil the air quality objectives but had alwaysrelied on "gaming" as the justification. EPA had never attempted to analyze how much importedgasoline would be susceptible to gaming or whether, in case of gaming, the impact on health

20"United States - Section 337 of the Tariff Act of 1930", BISD 36S/345, adopted on 7 November 1989 and "Thailand - Restrictions

on Importation of and Internal Taxes on Cigarettes", BISD 37/200, adopted 7 November 1990.

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objectives would be unacceptable. In that regard, Venezuela recalled that EPA itself hadacknowledged that the environmental impact of gaming was speculative because it lacked "clearevidence" regarding the actual average quality of 1990 imported gasoline and did not knowwhether a significant amount of imported gasoline was "cleaner" than the statutory baseline.Moreover, so little gasoline was imported that the potential differential emissions -betweenindividual and statutory baselines- would not have any significant impact on the average emissionquality of the gasoline consumed in the United States.

3.83 Brazil stated that, for the reasons already expressed under arguments relating to Articles Iand III of the General Agreement and Article 2.1 of the TBT Agreement, the Gasoline Rulecreated "unnecessary obstacles to international trade" in a manner contrary to Article 2.2 of theTBT Agreement.

2. Article 12 - Special and Differential Treatmentof Developing Country Members

3.84 Venezuela observed that Article 12 of the TBT Agreement imposed certain obligations onthe United States with respect to developing countries. Venezuela did not seek any specialtreatment but merely wanted its gasoline to be held to the same baseline requirements as USgasoline. Venezuela stated that it was not asking for the Panel to rule under Article 12 butintended to point out that the discriminatory treatment affecting Venezuelan gasoline wasparticularly objectionable in the light of that provision.

IV. SUBMISSIONS BY INTERESTED THIRD PARTIES

A. The European Communities

4.1 The European Communities (the "EC") stated that, as an exporter to the United States ofgasoline for automobiles and other fuel oils, it had a substantial interest in the matter before thePanel. In 1994, the total volume of EC-12 exports to the United States for gasoline represented6'423'411 metric tonnes. This volume had increased since the enlargement of the EC, on1 January 1995. The EC declared that it did not contest the right of the United States to enforcelegislation whose purpose was to protect human, animal or plant life or health. However, suchmeasures had to be in conformity with the provisions of the WTO Agreement and not be appliedso that imports from third countries were discriminated against, that the domestic industry wasafforded protection, or that disguised restrictions were imposed on international trade.

4.2 The EC stated that, while agreeing with the United States that the application of formallyidentical provisions could, in certain cases, accord in practice less favourable treatment toimported products, it could not agree with the consequences which the United States seemed todraw from the findings of the panel report "United States - Section 337 of the Tariff Act of 1930"for the present case. It could not be concluded from that report that when it was not technicallyfeasible to apply to imported products the rule applied to domestic products, it was then sufficientto find a workable rule which was sufficiently close to that applicable to domestic products,without changing that latter rule. The EC considered that the logic behind Article III of theGeneral Agreement required Members to achieve effective non-discrimination or absence ofprotection. Such an objective should be achieved preferably by amending existing rules or re-formulating new rules which could be applied identically to domestic and imported goods.

4.3 The EC argued that risks of violations of Article III:1 and 4 resulted from the fact thatMethods 2 and 3 of establishing individual baselines were only available to domestic refiners.

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The EC did not want to discuss the accuracy of the arguments developed by the United States withrespect to the feasibility of individual baselines for foreign refiners, but assumed, for the sake ofargument, that Methods 2 and 3 could not be applied to imported gasoline in this case.Considering the explanations given by the United States as to what the statutory baselinerepresented, and assuming they were correct, the EC failed to see why US refiners could not besubject to the statutory baseline, like importers and blenders. Such a measure would have been intotal conformity with Article III, paragraphs 1 and 4. In addition, it appeared from theinformation submitted by the main parties to the dispute that barely half of the US refiners hadtheir individual baselines approved at the time of the entry into force of the Rule. While notaffecting the existence of the violation, this fact proved that the application of the statutorybaseline erga omnes would probably not affect significantly the competitive position of USrefiners.

4.4 The EC understood the concern expressed by the United States that certain importers andblenders, who had the flexibility to select gasoline from various sources, might have an advantageover US refiners if the statutory baseline were to be applied to all gasoline producers. However,this potential advantage was inherent to the averaging mechanism contained in the Gasoline Ruleand was not a sufficient reason to introduce a system which would unavoidably favour certain USproducers. Article III required that no less favourable treatment be given to imported products,not the contrary21. If one considered that a US refiner might have produced extremely "dirty"gasoline in 1990, the Gasoline Rule did not give an immediate incentive for US refiners to adapttheir production, whereas increased access to US market for third country gasoline was dependenton a gradual approximation of their quality compared with the statutory baseline. Therefore, theGasoline Rule entailed at the very least a serious risk of discrimination, which constituted, byitself, a form of discrimination22. According to past panel reports, the United States had to showthat, despite the different treatment accorded to imported products, the no less favourabletreatment standard of Article III was met.

4.5 Regarding the 75 % Rule, the EC argued that the fact it was based on objective criteria,as argued by the United States, was not sufficient to avoid discrimination in the present case. Ade facto discrimination in the application of the most-favoured-nation principle was possible, asthe criteria used to grant that treatment were based on the situation in 1990. An importer meetingthe required criteria after that date could not have invoked it. Hence, the Rule could only benefitcertain countries where US companies had invested in local refiners before 1990. Asacknowledged by the United States, this could have included Canada, where certain US companiesowned refineries at that time. However, this could not have benefitted production of refinerslocated in countries where, for instance, the petroleum industry was mostly, if not exclusively,owned by the State in 1990. Therefore, the 75 % Rule was de facto not based on objectivecriteria, and hence contrary to Article I of the General Agreement. The EC further argued thatthe Panel should make a finding on this Rule despite the fact that it could no longer be invoked.A Panel should be guided in its examination by the content of the "matter" -the 75 % Rule in thepresent case- referred to it23. A determination by the Panel on the conformity of that rule withArticle I would help avoid this kind of measure being found in the future in the legislation of aWTO Member.

21"United States - Section 337 of the Tariff Act of 1930", BISD 36S/345 (adopted on 7 November 1989).

22"EEC - Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal Feed Proteins", BISD 37S/86

(adopted on 25 January 1990).23United States - Imposition of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products from France,

Germany and the United Kingdom", SCM/185, 15 November 1994 (not adopted).

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4.6 As to whether the Gasoline Rule fell under the TBT Agreement, the EC stated that itagreed with the United States that the requirements on chemical ingredients did not need to besatisfied by each shipment and also that, the measures at issue being based on a yearly average,the importers remained free to import different varieties of gasoline provided that the annualaverage met the requirements. However, the EC doubted that a standard should be excluded fromthe scope of the TBT Agreement only for the reason that it required compliance on a yearly basisinstead of on a shipment basis. It was clear that the importer had only to balance various qualitiesof gasoline in order to meet the statutory baseline. From the point of view of the exportingcountry, the Gasoline Rule created a clear incentive for adapting its production standards if itwanted to maintain or increase its share of the US market. Exporting refiners not adapting theirproduction standards to US requirements (or at least not gradually narrowing the difference downto total compliance) would be unlikely to increase their sales in the US since importers had toblend or balance the "dirty" imported gasoline with "cleaner" gasoline. The "cleaner" gasolinebeing likely to be more expensive, importers would gradually cease to import "dirty" gasoline,thus obliging foreign refiners to meet the statutory baseline for each shipment. For this reason,the EC could not agree with the United States that the non-degradation requirements did notspecify particular "product characteristics". Although no maximum content was set per shipment,the US methodology resulted in pushing the market to apply standards gradually closer to theaverages referred to in the rule.

4.7 The EC considered that, in certain circumstances, the US system would impose a clearlydefined standard. For example, an exporter setting up its own importation network in the UnitedStates was likely to be obliged to immediately adapt its production to US standards in order not tohave to import gasoline of different qualities at the same time as its own gasoline (with the relatedincreased costs). Therefore, the EC believed that the Gasoline Rule imposed a technicalregulation within the meaning of the TBT Agreement. The EC further considered that, if onewere to agree with the US arguments, such an averaging system could represent a potential forcircumvention of the TBT Agreement, mainly in the field of chemical products where it was usedrelatively frequently. If the mere use of an averaging requirement was sufficient to exclude theTBT Agreement from applying to certain environmental standards, then the increased legalprotection resulting from Article 2.2 of that Agreement compared, for instance, with Article XXof the General Agreement, would no longer be available for the other Members.

4.8 Referring to the findings of a previous panel, the EC considered that, from a proceduralpoint of view, the United States was entitled to rely on Article III and on Article XX in thealternative24. However, Article XX, as an exception, had to be interpreted strictly, and the ECwas of the view that the Gasoline Rule, in the way it was applied, did not meet the requirementsof Article XX but imposed a disguised restriction on trade by allowing US refiners to continueproducing "dirty" gasoline meeting their individual baselines, while imposing actual constraints onforeign producers to adapt their production to US standards. Such a protectionist effect wouldprobably not be created if identical baselines were applied to both imported and domesticallyproduced gasoline. Moreover, as demonstrated above, the application of the statutory baseline toboth domestic and imported gasoline would have achieved the same aim without introducingdiscrimination between sources of supply. In any event, measures inconsistent with the GeneralAgreement were not necessary to enforce the 1990 CAA amendment. Therefore, the ECconsidered that, even if the Gasoline Rule did not constitute a "means of arbitrary or unjustifiablediscrimination between countries where the same conditions prevail", it was obviously a means toalleviate the restructuring efforts of the US refining industry while at the same time requiringforeign producers to adapt almost immediately their production. Hence, while officially pursuing

24"United States - Restrictions on Imports of Tuna", DS21/R, 3 September 1991, para. 5.22 (not adopted).

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environmental objectives, it introduced a disguised restriction on trade. The EC concluded thatthe baselines system was not proportionate and did not meet the necessity test of Article XX.

B. Norway

4.9 Norway stated that its reasons for reserving its rights as a third party in this case were inlegal and practical terms very similar to those argued by Venezuela and Brazil in their respectiverequests for the establishment of a panel. The Gasoline Regulation denied national treatment togasoline imported from Norway. Therefore, Norway supported Venezuela and Brazil's requestthat the Panel find the Gasoline Rule to be inconsistent with Articles I and III of the GeneralAgreement, and with Article 2 of the TBT Agreement.

4.10 Norway said that the Norwegian State Oil Company ("Statoil") was experiencing a verydifficult situation because of the way the Gasoline Rule operated. There was a considerableincentive for Statoil to be able to export to the US market as compared to other markets. In1989, Statoil built the Mongstad refinery with the objective of selling to the United States some0.5 millions tons per year out of a total gasoline production of 2,5 millions tons per year. In1990, Statoil sold a total of about 470'000 tons of gasoline to the United States, out of whichabout 350'000 tons came from Mongstad refinery. Since December 1994, Statoil had notexported gasoline from Mongstad to the United States.

4.11 Norway argued that changing specifications was in the nature of the refining business.However, like Venezuela's and Brazil's refineries, Statoil was affected by the discriminatorynature of the US regulation. Assigned to the statutory baseline for its exports of reformulatedgasoline until 1998 and for conventional gasoline indefinitely, the Mongstad refinery would notcompetitively be able to produce any volumes of gasoline, based on current refineryconfigurations and investment plans. Norway considered that, if the Panel ruled in favour ofVenezuela and Brazil, Statoil would, as an "Importer of Record" in 1990, be allowed to establishits individual 1990 baseline for the volume sold that year.

V. INTERIM REVIEW

5.1 On 18 December 1995, the United States requested the Panel to review in accordance withArticle 15.2 of the DSU precise aspects of the interim report that had been issued to the parties on11 December 1995, and to hold a meeting for that purpose. The Panel met with the parties on 3January 1996 in order to hear their arguments concerning the interim report. The Panel carefullyreviewed the arguments presented by the United States and the responses offered by Venezuelaand Brazil.

5.2 In respect of the interim report’s discussion of Article III, the United States argued that inseveral respects the interim report dealt with issues that were not disputed by the parties or wereunnecessary to the Panel’s conclusion that aspects of the Gasoline Rule violated Article III:4.While the Panel did not agree with all the arguments made by the United States, it did revise thereport to take into account those arguments with which it agreed and paragraphs 6.5 and 6.9 -6.11 of the findings reflect the Panel’s response.

5.3 In respect of the interim report’s discussion of Article XX(b), the United States objectedto the Panel’s use of specific terms which did not appear in the text of the provision, thedescription of the US argument, and the Panel’s analysis of alternative measures available to theUnited States. The Panel revised the report where it accepted the US arguments and paragraphs6.20 - 6.25 and 6.27 - 6.28 of the findings reflect the Panel’s response.

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5.4 In respect of the interim report’s discussion of Article XX(d), the United States objectedto the Panel’s use of specific terms which did not appear in the text of the provision. The Panelaccepted the US arguments and paragraph 6.31 of the revised findings reflects the Panel’sresponse.

5.5 In respect of the interim report’s discussion of Article XX(g), the United States objectedto the Panel’s use of specific terms which did not appear in the text of the provision, and theanalysis of alternative measures available to the United States. Venezuela requested a change tothe description of its argument under this provision. The Panel revised the report where itaccepted the arguments of the US and Venezuela and paragraphs 6.35 - 6.36 and 6.40 - 6.41 ofthe findings reflect the Panel’s response.

5.6 In respect of the interim report’s descriptive section, Venezuela and the United Statessuggested further changes which the Panel took into account in re-examining that part of thereport. The Panel revised the descriptive section of the report where it accepted the need forthese changes.

VI. FINDINGS

A. Introduction

6.1 The Panel noted that the dispute arose from the following facts. The Clean Air Act aimsto control and reduce air pollution in the United States. The Act and certain of its regulations (the“Gasoline Rule”) set standards for gasoline quality intended to reduce air pollution, includingozone, caused by motor vehicle emissions. From 1 January 1995, the Gasoline Rule permits onlygasoline of a specified cleanliness (“reformulated gasoline”) to be sold in areas of high airpollution. In other areas, only gasoline no dirtier than that sold in the base year of 1990(“conventional gasoline”) can be sold.

6.2 The Gasoline Rule applies to refiners, blenders and importers of gasoline. It requires thatcertain chemical characteristics of the gasoline in which they deal respect, on an annual averagebasis, defined levels. In the Gasoline Rule some of these levels are fixed; others are expressed as“non-degradation” requirements. Under the non-degradation requirements, each domestic refinermust maintain, on an annual average basis, the relevant gasoline characteristics at levels no worsethan its “individual baseline” — that is, the annual average levels achieved by that refiner in 1990.To establish an individual baseline, a refiner must show evidence of the quality of gasolineproduced or shipped in 1990 (“Method 1"). If that evidence is not complete, then it must use dataon the quality of blendstock produced in 1990 (“Method 2"). If these two methods do not resultin sufficient evidence, the refiner must also use data on the quality of post-1990 gasolineblendstock or gasoline (“Method 3").

6.3 Importers are also required to use an individual baseline, but only in the case (unlikely,according to the parties to the dispute) that they are able to establish it using Method 1 data.Unlike domestic refiners, they are not allowed to establish an individual baseline by using thesecondary or tertiary data specified in Methods 2 and 3. If an importer cannot produce Method 1data, then it must use a “statutory baseline” which the United States claims is derived from theaverage characteristics of all gasoline consumed in the United States in 1990. Some otherdomestic entities (such as refiners with only partial or no 1990 operations, and blenders withinsufficient Method 1 data) are also assigned the statutory baseline. Exceptionally, importers thatimported in 1990 at least 75 percent of the production of an affiliated foreign refinery are treatedas domestic refiners for the purpose of establishing baselines. Since this dispute concerns only the

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Gasoline Rule’s non-degradation requirements, and not reformulated and conventional gasoline assuch, the Panel will refer generally to “gasoline” in the course of its findings.

6.4 Venezuela and Brazil claim that the Gasoline Rule violates the national treatmentprovisions of Article III:1 and 4 of the General Agreement and the most-favoured-nation provisionof Article I. Venezuela claims in the alternative that the Gasoline Rule has nullified and impairedbenefits under the non-violation provisions of Article XXIII:1(b). Venezuela and Brazil also claimthat the Gasoline Rule violates Article 2 of the Agreement on Technical Barriers to Trade (the“TBT Agreement”). The United States rejects these claims and argues that the Gasoline Rule canbe justified under the exceptions contained in Article XX, paragraphs (b), (d) and (g), whichargument is rejected by Venezuela and Brazil. It also argues that the Gasoline Rule does notcome within the scope of Article 2 of the TBT Agreement.

B. Article III

1. Article III:4

6.5 The Panel proceeded to examine the claim that the Gasoline Rule violates Article III:4 ofthe General Agreement, which states:

The products of the territory of any contracting party imported into the territory ofany other contracting party shall be accorded treatment no less favourable thanthat accorded to like products of national origin in respect of all laws, regulationsand requirements affecting their internal sale, offering for sale, purchase,transportation, distribution or use.

The Panel noted that under this provision the complainants are required to show the existence of:(a) a law, regulation or requirement affecting the internal sale, offering for sale, purchase,transportation, distribution or use of an imported product; and (b) treatment accorded in respectof the law, regulation or requirement that is less favourable to the imported product than to thelike product of national origin. The Panel agreed with the parties that the Gasoline Rule was alaw, regulation or requirement affecting the internal sale, offering for sale, purchase,transportation, distribution or use of an imported product. It proceeded therefore to considerwhether the Gasoline Rule accorded less favourable treatment to imported products than to likeproducts of national origin.

6.6 The Panel noted the arguments of Venezuela and Brazil that imported gasoline was “like”domestic gasoline, but received treatment less favourable because imported gasoline was subjectedto more demanding quality requirements than gasoline of US origin. The United States repliedthat gasoline from similarly-situated parties was treated in the same manner under the GasolineRule. Gasoline from importers was treated no less favourably than that from other domestic non-refiners such as blenders, or refiners who had only limited or no operations in 1990.

6.7 The Panel observed that Article III:4 deals with treatment to be accorded to like products.However, the text does not specify exhaustively those aspects that determine whether the productsare “like”. In resolving this interpretative issue the Panel referred, in conformity with Article 3.2of the Understanding on Rules and Procedures Governing the Settlement of Disputes, to theVienna Convention on the Law of Treaties, which states in Article 31 that “a treaty shall be

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interpreted in good faith in accordance with the ordinary meaning to be given to the terms of thetreaty in their context and in the light of its object and purpose”.25

6.8 The Panel proceeded to examine this issue in the light of the ordinary meaning of the term“like”. It noted that the word can mean “similar”, or “identical”. The Panel then examined thepractice of the CONTRACTING PARTIES under the General Agreement. This practice was relevant sinceArticle 31 of the Vienna Convention directs that “subsequent practice in the application of thetreaty which establishes the agreement of the parties regarding its interpretation” is also to beconsidered in the interpretation of a treaty. The Panel noted that various criteria for thedetermination of like products under Article III had previously been applied by panels. Thesewere summarized in the 1970 Working Party Report on Border Tax Adjustments, which hadobserved:

With regard to the interpretation of the term ‘like or similar products’, whichoccurs some sixteen times throughout the General Agreement, it was recalled thatconsiderable discussion had taken place . . . but that no further improvement ofthe term had been achieved. The Working Party concluded that problems arisingfrom the interpretation of the terms should be examined on a case-by-case basis.This would allow a fair assessment in each case of the different elements thatconstitute a ‘similar’ product. Some criteria were suggested for determining, on acase-by-case basis, whether a product is ‘similar’: the product's end-uses in agiven market; consumers' tastes and habits, which change from country tocountry; the product's properties, nature and quality.26

These criteria had been applied by the panel in the 1987 Japan Alcohol case in the examinationunder Article III:2 of internal taxation measures. That panel had proceeded on a case-by-casebasis, determining whether various alcoholic beverages were “like” on the basis of “their similarproperties, end-uses and usually uniform classification in tariff nomenclatures.”27 The Panelconsidered that those criteria were also applicable to the examination of like products underArticle III:4.

6.9 In light of the foregoing, the Panel proceeded to examine whether imported and domesticgasoline were like products under Article III:4. The Panel observed first that the United Statesdid not argue that imported gasoline and domestic gasoline were not like per se. It had arguedrather that with respect to the treatment of the imported and domestic products, the situation of theparties dealing in the gasoline must be taken into consideration. The Panel, recalling its previousdiscussion of the factors to be taken into account in the determination of like product, noted thatchemically-identical imported and domestic gasoline by definition have exactly the same physicalcharacteristics, end-uses, tariff classification, and are perfectly substitutable. The Panel foundtherefore that chemically-identical imported and domestic gasoline are like products underArticle III:4.

6.10 The Panel next examined whether the treatment accorded under the Gasoline Rule toimported gasoline was less favourable than that accorded to like gasoline of national origin. ThePanel observed that domestic gasoline benefitted in general from the fact that the seller who is arefiner used an individual baseline, while imported gasoline did not. This resulted in lessfavourable treatment to the imported product, as illustrated by the case of a batch of imported

25Vienna Convention on the Law of Treaties, Art. 31.

26L/3464, adopted on 2 December 1970, BISD 18S/97, 102, para. 18.

27"Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages", BISD 34S/83, 115, para. 5.6

(adopted on 10 November 1987).

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gasoline which was chemically-identical to a batch of domestic gasoline that met its refiner'sindividual baseline, but not the statutory baseline levels. In this case, sale of the imported batchof gasoline on the first day of an annual period would require the importer over the rest of theperiod to sell on the whole cleaner gasoline in order to remain in conformity with the GasolineRule. On the other hand, sale of the chemically-identical batch of domestic gasoline on the firstday of an annual period would not require a domestic refiner to sell on the whole cleaner gasolineover the period in order to remain in conformity with the Gasoline Rule. The Panel also notedthat this less favourable treatment of imported gasoline induced the gasoline importer, in the caseof a batch of imported gasoline not meeting the statutory baseline, to import that batch at a lowerprice. This reflected the fact that the importer would have to make cost and price allowancesbecause of its need to import other gasoline with which the batch could be averaged so as to meetthe statutory baseline. Moreover, the Panel recalled an earlier panel report which stated that “thewords ‘treatment no less favourable’ in paragraph 4 call for effective equality of opportunities forimported products in respect of laws, regulations and requirements affecting the internal sale,offering for sale, purchase, transportation, distribution or use of products.”28 The Panel foundtherefore that since, under the baseline establishment methods, imported gasoline was effectivelyprevented from benefitting from as favourable sales conditions as were afforded domestic gasolineby an individual baseline tied to the producer of a product, imported gasoline was treated lessfavourably than domestic gasoline.

6.11 The Panel then examined the US argument that the requirements of Article III:4 are metbecause imported gasoline is treated similarly to gasoline from similarly situated domestic parties— domestic refiners with limited 1990 operations and blenders. According to the United States,the difference in treatment between imported and domestic gasoline was justified becauseimporters, like domestic refiners with limited 1990 operations and blenders, could not reliablyestablish their 1990 gasoline quality, lacked consistent sources and quality of gasoline, or had theflexibility to meet a statutory baseline since they were not constrained by refinery equipment andcrude supplies. The Panel observed that the distinction in the Gasoline Rule between refiners onthe one hand, and importers and blenders on the other, which affected the treatment of importedgasoline with respect to domestic gasoline, was related to certain differences in the characteristicsof refiners, blenders and importers, and the nature of the data held by them. However, ArticleIII:4 of the General Agreement deals with the treatment to be accorded to like products; itswording does not allow less favourable treatment dependent on the characteristics of the producerand the nature of the data held by it. The Panel noted that in the Malt Beverages case, a taxregulation according less favourable treatment to beer on the basis of the size of the producer wasrejected.29 Although this finding was made under Article III:2 concerning fiscal measures, thePanel considered that the same principle applied to regulations under Article III:4. Accordingly,the Panel rejected the US argument that the requirements of Article III:4 are met because importedgasoline is treated similarly to gasoline from similarly situated domestic parties.

6.12 Apart from being contrary to the ordinary meaning of the terms of Article III:4, anyinterpretation of Article III:4 in this manner would mean that the treatment of imported anddomestic goods concerned could no longer be assured on the objective basis of their likeness asproducts. Rather, imported goods would be exposed to a highly subjective and variable treatmentaccording to extraneous factors. This would thereby create great instability and uncertainty in theconditions of competition as between domestic and imported goods in a manner fundamentallyinconsistent with the object and purpose of Article III.

28"United States - Section 337 of the Tariff Act of 1930", BISD 36S/386, para 5.11 (adopted on 7 November 1989).

29"United States - Measures Affecting Alcoholic and Malt Beverages", BISD 39S/206, para. 5.19 (adopted on 19 June 1992).

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6.13 The Panel considered that the foregoing was sufficient to dispose of the US argument. Itnoted, however, that even if the US approach were to be followed, under any approach based on“similarly situated parties” the comparison could just as readily focus on whether importedgasoline from an identifiable foreign refiner was treated more or less favourably than gasolinefrom an identifiable US refiner. There were, in the Panel’s view, many key respects in whichthese refineries could be deemed to be the relevant similarly situated parties, and the Panel couldfind no inherently objective criteria by means of which to distinguish which of the many factorswere relevant in making a determination that any particular parties were “similarly situated.”Thus, although these refineries were similarly situated, the Gasoline Rule treated the products ofthese refineries differently by allowing only gasoline produced by the domestic entity to benefitfrom the advantages of an individual baseline. This consequential uncertainty and indeterminacyof the basis of treatment underlined, in the view of the Panel, the rationale of remaining withinthe terms of the clear language, object and purpose of Article III:4 as outlined above inparagraph 6.12.

6.14 The Panel then noted the argument of the United States that the treatment accorded togasoline imported under a statutory baseline was on the whole no less favourable than thataccorded to domestic gasoline under individual refiner baselines. The United States claimed thatthe Gasoline Rule did not discriminate against imported gasoline, since the statutory baseline (bythe nature of its calculation) and the average of the sum of the individual baselines bothcorresponded to average gasoline quality in 1990, and that domestic and imported gasoline wastreated equally overall. The Panel noted that, in these circumstances, the argument that onaverage the treatment provided was equivalent amounted to arguing that less favourable treatmentin one instance could be offset provided that there was correspondingly more favourable treatmentin another. This amounted to claiming that less favourable treatment of particular importedproducts in some instances would be balanced by more favourable treatment of particular productsin others. A previous panel had found that

the "no less favourable" treatment requirement of Article III:4 has to beunderstood as applicable to each individual case of imported products. The Panelrejected any notion of balancing more favourable treatment of some importedproducts against less favourable treatment of other imported products. If thisnotion were accepted, it would entitle a contracting party to derogate from the noless favourable treatment obligation in one case, or indeed in respect of onecontracting party, on the ground that it accords more favourable treatment in someother case, or to another contracting party. Such an interpretation would lead togreat uncertainty about the conditions of competition between imported anddomestic products and thus defeat the purposes of Article III.30

The Panel concurred with this reasoning that under Article III:4 less favourable treatment ofparticular imported products in some instances could not be balanced by more favourabletreatment of other imported products in other instances. The Panel therefore rejected the USargument.

6.15 The Panel observed that, considered even from the point of view of imported gasoline as awhole, treatment was generally less favourable. Importers of gasoline had to adapt to an assignedaverage standard not linked to the particular gasoline imported, while refiners of domestic gasolinehad only to meet a standard linked to their own product in 1990. Statistics on baselines bore outthis difference in treatment. According to the United States, as of August 1995, approximately

30"United States - Section 337 of the Tariff Act of 1930", BISD 36S/345, para. 5.14 (adopted on 7 November 1989).

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100 US refiners, representing 98.5 percent of gasoline produced in 1990, had received EPAapproval of their individual baselines. Only three of the refiners met the statutory baseline for allparameters. Thus, while 97 percent of US refiners did not and were not required to meet thestatutory baseline, the statutory baseline was required of importers of gasoline, except in the rarecase (according to the parties) that they could establish a baseline using Method 1.

6.16 The Panel found that imported and domestic gasoline were like products, and that since,under the baseline establishment methods, imported gasoline was effectively prevented frombenefitting from as favourable sales conditions as were afforded domestic gasoline by anindividual baseline tied to the producer of a product, imported gasoline was treated less favourablythan domestic gasoline.

2. Article III:1

6.17 The Panel then noted the arguments advanced by Venezuela and Brazil that the GasolineRule was applied “so as to afford protection to domestic production” contrary to Article III:1.The United States disagreed and argued in the alternative that Article III:1 was only hortatory andcould not form the basis of a violation. The Panel examined first whether, after making a findingof inconsistency with Article III:4, it should make a finding under Article III:1. The Panel notedthat the panel in the Malt Beverages case had examined a claim made under paragraphs 1, 2 and 4of Article III. That panel had concluded that “because Article III:1 is a more general provisionthan either Article III:2 or III:4, it would not be appropriate for the Panel to consider [thecomplainant’s] Article III:1 allegations to the extent that the Panel were to find [the respondent’s]measures to be inconsistent with the more specific provisions of Articles III:2 and III:4.”31 Thepresent Panel agreed with this reasoning, and therefore did not find it necessary to examine theconsistency of the Gasoline Rule with Article III:1.

C. Article I:1

6.18 The Panel proceeded to examine the claim of Venezuela and Brazil that the Gasoline Ruleviolated the most-favoured-nation provision of Article I:1 by permitting an importer to usesecondary evidence to establish an individual baseline, provided that in 1990 it imported at least75 percent of the production from an affiliated foreign refinery. Venezuela and Brazil claimedthat the rule targeted a small number of countries, and that the different treatment was based oncriteria (ownership and proportion of product purchased) that had no link to the product, asrequired under Article I:1. The United States claimed the rule was based on objective criteriaand, in any case, it was not applicable because no importer had qualified for the benefit before thedeadline.

6.19 The Panel observed that it had not been the usual practice of a panel established under theGeneral Agreement to rule on measures that, at the time the panel’s terms of reference were fixed,were not and would not become effective. In the 1978 Animal Feed Protein case, the Panel ruledon a discontinued measure, but one that had terminated after agreement on the panel’s terms ofreference.32 In the 1980 Chile Apples case, the panel ruled on a measure terminated beforeagreement on the panel’s terms of reference; however, the terms of reference in that casespecifically included the terminated measure and, it being a seasonal measure, there remained the

31"United States - Measures Affecting Alcoholic and Malt Beverages", BISD 39S/206, 270, para. 5.2 (adopted on 19 June 1992).

32"EEC - Measures on Animal Feed Proteins", L/4599, BISD 25S/49 (adopted on 14 March 1978). See also the Report of the Panel

on "United States - Prohibitions of Imports of Tuna and Tuna Products from Canada", BISD 29S/91, 106, para. 4.3 (adopted on

22 February 1982).

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prospect of its reintroduction.33 In the present case, the Panel’s terms of reference wereestablished after the 75 percent rule had ceased to have any effect, and the rule had not beenspecifically mentioned in the terms of reference. The Panel further noted that there was noindication by the parties that the 75 percent rule was a measure that, although currently not inforce, was likely to be renewed. Finally, the Panel considered that its findings on treatment underthe baseline establishment methods under Articles III:4 and XX (b), (d) and (g) would in any casehave made unnecessary the examination of the 75 percent rule under Article I:1. The Panel didnot therefore proceed to examine this aspect of the Gasoline Rule under Article I:1 of the GeneralAgreement.

D. Article XX(b)

6.20 The Panel proceeded to examine whether the aspect of the baseline establishment methodsfound inconsistent with Article III:4 could, as argued by the United States, be justified underparagraph (b) of Article XX. The relevant parts of Article XX were as follows:

Subject to the requirement that such measures are not applied in a manner whichwould constitute a means of arbitrary or unjustifiable discrimination betweencountries where the same conditions prevail, or a disguised restriction oninternational trade, nothing in this Agreement shall be construed to prevent theadoption or enforcement by any contracting party of measures:

(b) necessary to protect human, animal or plant life or health;

The Panel noted that as the party invoking an exception the United States bore the burden of proofin demonstrating that the inconsistent measures came within its scope. The Panel observed thatthe United States therefore had to establish the following elements:

(1) that the policy in respect of the measures for which the provision was invoked fellwithin the range of policies designed to protect human, animal or plant life orhealth;

(2) that the inconsistent measures for which the exception was being invoked werenecessary to fulfil the policy objective; and

(3) that the measures were applied in conformity with the requirements of theintroductory clause of Article XX.

In order to justify the application of Article XX(b), all the above elements had to be satisfied.

1. Policy goal of protecting human, animal or plant life or health

6.21 The Panel noted the United States argument that air pollution, in particular ground-levelozone and toxic substances, presented health risks to humans, animals and plants. The UnitedStates argued that, since about one-half of such pollution was caused by vehicle emissions, and theGasoline Rule reduced these, the Gasoline Rule was within the range of policy goals described inArticle XX(b). Venezuela and Brazil did not disagree with this view. The Panel agreed with theparties that a policy to reduce air pollution resulting from the consumption of gasoline was a

33"EEC - Restrictions on Imports of Apples from Chile", BISD 27S/98, (adopted on 10 November 1980).

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policy within the range of those concerning the protection of human, animal and plant life orhealth mentioned in Article XX(b).

2. Necessity of the inconsistent measures

6.22 The Panel recalled its finding in paragraph 6.16 that imported gasoline was treated lessfavourably than domestic gasoline, since, under the baseline establishment methods, importedgasoline was prevented from benefitting from as favourable sales conditions as were affordeddomestic gasoline by an individual baseline tied to the producer of a product. The Panel thenproceeded to examine whether the aspect of the Gasoline Rule found inconsistent with the GeneralAgreement was necessary to achieve the stated policy objectives under Article XX(b). The Panelnoted that it was not the necessity of the policy goal that was to be examined, but whether or notit was necessary that imported gasoline be effectively prevented from benefitting from asfavourable sales conditions as were afforded by an individual baseline tied to the producer of aproduct. It was the task of the Panel to address whether these inconsistent measures werenecessary to achieve the policy goal under Article XX(b). It was therefore not the task of thePanel to examine the necessity of the environmental objectives of the Gasoline Rule, or of parts ofthe Rule that the Panel did not specifically find to be inconsistent with the General Agreement.

6.23 The Panel then turned to the arguments of the parties relating to that aspect of theGasoline Rule found inconsistent with the General Agreement. The United States argued that notall entities dealing in gasoline could be assigned an individual baseline and, of those who could beassigned such a baseline, not all could use the same types of secondary or tertiary evidence(Methods 2 and 3) to establish it. Certain entities including importers, blenders and refinerswhich did not have continuous 1990 operations, were simply not in a position to furnish thissecondary or tertiary evidence. Venezuela and Brazil argued on the other hand that foreignrefiners should be accorded their own individual baselines under the Gasoline Rule using the sametypes of evidence, as easily available to them as to domestic refiners. Alternatively, they arguedthat importers should be able to use individual 1990 baselines established for the foreign refinerswith whom they dealt. They noted that an EPA regulatory proposal had even been made alongthose lines in May 1994. The United States countered that such a proposal would not be feasiblebecause of: (1) the impossibility of determining the refinery of origin for each importedshipment; (2) the incentive to “game” the system thereby handed to exporters and importers; and(3) the difficulty for the United States to exercise an enforcement jurisdiction with respect to aforeign refinery, since the Gasoline Rule required criminal and civil sanctions in order to beeffective. The United States argued further against the use of foreign refiner baselines by citing“equity concerns” of importers that their use would favour those firms that dealt with Venezuelanproduct, and the existence of particular competitive conditions in the international market,including the flexibility maintained by foreign refiners.

6.24 The Panel proceeded to examine whether the United States had in fact demonstrated thatthe inconsistent measures found to violate Article III:4 were necessary to achieve the stated policyobjectives of the United States. The Panel noted that the term “necessary” had been interpreted inthe context of Article XX(d) by the panel in the Section 337 case which had stated that:

a contracting party cannot justify a measure inconsistent with another GATTprovision as "necessary" in terms of Article XX(d) if an alternative measure whichit could reasonably be expected to employ and which is not inconsistent with otherGATT provisions is available to it. By the same token, in cases where a measureconsistent with other GATT provisions is not reasonably available, a contracting

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party is bound to use, among the measures reasonably available to it, that whichentails the least degree of inconsistency with other GATT provisions.34

The same reasoning had been adopted by the 1990 Thai Cigarette panel in examining a measureunder Article XX(b). That panel saw no reason not to adopt the same interpretation of“necessity” under Article XX(b) as under Article XX(d), stating that

the import restrictions imposed by Thailand could be considered to be "necessary"in terms of Article XX(b) only if there were no alternative measures consistentwith the General Agreement, or less inconsistent with it, which Thailand couldreasonably be expected to employ to achieve its health policy objectives.35

The Panel also noted that while several past panels examining issues under Article XX hadidentified alternative measures that were reasonably available and fully consistent with the GeneralAgreement, they had also in other instances identified alternative measures that would be “lessinconsistent” with the General Agreement. For example, the panel in the 337 case found that,while a general exclusion order applying to imported products was not “necessary”, a limited inrem order could be justified even though it too was inconsistent with Article III:4.36 Recalling itsremarks in paragraph 6.22 above, the Panel considered that its task was thus to determine whetherthe United States had demonstrated whether it was necessary to maintain precisely thoseinconsistent measures whereby imported gasoline was effectively prevented from benefitting fromas favourable sales conditions as were afforded to domestic gasoline by an individual baseline tiedto the producer of a product. If there were consistent or less inconsistent measures reasonablyavailable to the United States, the requirement to demonstrate necessity would not have been met.

6.25 The Panel then examined whether there were measures consistent or less inconsistent withthe General Agreement that were reasonably available to the United States to further its policyobjectives of protecting human, animal and plant life or health. The Panel did not consider thatthe manner in which imported gasoline was effectively prevented from benefitting from asfavourable sales conditions as were afforded to domestic gasoline by an individual baseline tied tothe producer of a product was necessary to achieve the stated goals of the Gasoline Rule. In theview of the Panel, baseline establishment methods could be applied to entities dealing in importedgasoline in a way that granted treatment to imported gasoline that was consistent or lessinconsistent with the General Agreement. If a single statutory baseline applying to all entities —refiners, blenders and importers — was not the chosen regulatory method, then importers couldfor example be permitted to use a gasoline baseline applicable to imports derived, when possible,from evidence of the individual 1990 baselines of foreign refiners with whom the importercurrently dealt. Although such a scheme could result in formally different regulation for importedand domestic products, the Panel noted that previous panels had accepted that this could beconsistent with Article III:4.37 The requirement under Article III:4 to treat an imported productno less favourably than the like domestic product is met by granting formally different treatmentto the imported product, if that treatment results in maintaining conditions of competition for theimported product no less favourable than those of the like domestic product. Further, theseconditions of competition referred to those conditions that were established by governmentmeasures and would not therefore include factors such as the “flexibility of individual producers”in this case. The Panel noted finally that a regulatory scheme using foreign refiner baselines, to


35"Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes", BISD 37S/200, para. 75 (adopted on 7 November 1990).



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the extent that it did not distinguish between imported gasoline on the basis of its country oforigin, would not necessarily contravene Article I or other provisions of the General Agreement,and that the United States, notwithstanding suggestions that certain importers might have equitableconcerns, had not established the contrary.

6.26 The Panel noted the claims of the United States that allowing importers or foreign refinersto use individual baselines in such a way was not feasible for the reasons listed in paragraph 6.23.The Panel was not convinced that the United States had satisfied its burden of proving that thosereasons precluded the effective use of individual baselines in a manner which would allowimported products to obtain treatment that was consistent, or less inconsistent, with obligationsunder Article III:4. First, while the Panel agreed that it would be necessary under such a systemto ascertain the origin of gasoline, the Panel could not conclude that the United States had shownthat this could not be achieved by other measures reasonably available to it and consistent or lessinconsistent with the General Agreement. Indeed, the Panel noted that a determination of originwould often be feasible. The Panel examined, for instance, the case of a direct shipment to theUnited States. It considered that there was no reason to believe that, given the usual measuresavailable in international trade for determination of origin and tracking of goods (includingdocumentary evidence and third party verification) there was any particular difficulty sufficient towarrant the demands of the baseline establishment methods applied by the United States.

6.27 Second, the Panel did not agree that the United States had met its burden of showing thatthe “gaming” concern was an adequate justification for maintaining the inconsistency with ArticleIII:4 resulting from the baseline establishment methods. It was uncertain if, or to what extent,gaming would actually occur, especially given the small market share of imported gasoline(approximately 3 percent). Moreover, the Panel noted that the Gasoline Rule did not guarantee inits regulation of US entities that gasoline characteristics subject to non-degradation requirements(i.e. those regulated by baselines), would remain at the 1990 average levels. For example, therewas no volume cap on the production of reformulated gasoline by individual refineries, whichmeant that if producers of relatively dirtier gasoline expanded their relative share of production ofreformulated gasoline, the national average level of pollutants subject to the non-degradationrequirements would be greater than in 1990. Similarly, within the 1990 volume limitations, if theoutput of producers of relatively cleaner gasoline fell below 1990 levels, while output of othersdid not, national average levels of pollutants would be worse. Moreover, specific provisions ofthe Gasoline Rule permitted some refiners to produce dirtier gasoline than they produced in 1990(e.g., certain producers of JP-4 jet fuel) and permitted others to request specific derogation fromthe Rule. The Panel stressed that it was not finding that such events would occur, only that theycould under the Rule. Given that the Gasoline Rule did not therefore guarantee that gasolinecharacteristics subject to non-degradation requirements would remain at 1990 levels, the Panelconsidered that it was not consistent for the United States to insist that there could be no possibledeviation from achieving those levels in respect of imports, when it had not deemed it necessaryto be as exacting on its own domestic production. Moreover, slightly stricter overall requirementsapplied to both domestic and imported gasoline could offset any possibility of an adverseenvironmental effect from these causes, and allow the United States to achieve its desired level ofclean air without discriminating against imported gasoline. Such requirements could beimplemented by the United States at any time. The Panel concluded that the United States had notmet its burden of showing that concern over gaming was an adequate justification for maintainingthe inconsistency with Article III:4 resulting from the baseline establishment methods.

6.28 Third, the Panel did not accept that the United States had demonstrated that there was noother measure consistent, or less inconsistent, with Article III:4 reasonably available to enforcecompliance with foreign refiner baselines, or importer baselines based thereon. The imposition ofpenalties on importers was in the Panel’s view an effective enforcement mechanism used by the

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United States in other settings. In the view of the Panel, the United States had reasonablyavailable to it data for, and measures of, verification and assessment which were consistent or lessinconsistent with Article III:4. For instance, although foreign data may be formally less subject tocomplete control by US authorities, this did not amount to establishing that foreign data could notin any circumstances be sufficiently reliable to serve US purposes. This, however, was thepractical effect of the application of the Gasoline Rule. In the Panel's view, the United States hadnot demonstrated that data available from foreign refiners was inherently less susceptible toestablished techniques of checking, verification, assessment and enforcement than data for othertrade in goods subject to US regulation. The nature of the data in this case was similar to datarelied upon by the United States in other contexts, including, for example, under the applicationof antidumping laws. In an antidumping case, only when the information was not supplied ordeemed unverifiable did the United States turn to other information. If a similar practice were tobe applied in the case of the Gasoline Rule, then importers could, for instance, be permitted to usethe individual baselines of foreign refiners for imported gasoline from those refiners, with thestatutory baseline being applied only when the source of imported gasoline could not bedetermined or a baseline could not be established because of an absence of data. In the Panel'sview, because allowing for such a possibility was reasonably available to the United States andwould entail a lesser degree of inconsistency with the General Agreement, the United States hadfailed to demonstrate the necessity of the Gasoline Rule's inconsistency with Article III:4 on thismatter.

6.29 In view of the Panel’s finding that the aspect of the baseline establishment methods foundinconsistent with Article III:4 was not “necessary” under Article XX(b), the Panel did not proceedto examine whether it met also the conditions in the introductory clause to Article XX.

E. Article XX(d)

6.30 The Panel proceeded to examine whether the aspect of the baseline establishment methodsfound inconsistent with Article III:4 could, as argued by the United States, be justified underparagraph (d) of Article XX. The relevant parts of Article XX were as follows:


(d) necessary to secure compliance with laws or regulations which are notinconsistent with the provisions of this Agreement, including those relatingto customs enforcement, the enforcement of monopolies operated underparagraph 4 of Article II and Article XVII, the protection of patents, trademarks and copyrights, and the prevention of deceptive practices;

6.31 The Panel recalled that the party invoking an exception under Article XX bore the burdenof proving that the inconsistent measures came within its scope. The Panel observed that theUnited States therefore had to demonstrate the following elements:

(1) that the measures for which the exception were being invoked - that is, theparticular trade measures inconsistent with the General Agreement - securecompliance with laws or regulations themselves not inconsistent with the GeneralAgreement;

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(2) that the inconsistent measures for which the exception was being invoked werenecessary to secure compliance with those laws or regulations; and


In order to justify the application of Article XX(d), all the above elements had to be satisfied.

1. Securing compliance with consistent laws or regulations

6.32 The Panel proceeded to examine whether the aspect of the baseline establishment methodsfound inconsistent with the General Agreement secured compliance with a law or regulation notinconsistent with the General Agreement. The United States argued that the non-degradationrequirements were laws and regulations not inconsistent with the General Agreement, and that thebaseline establishment methods secured compliance with these. Venezuela argued that the UnitedStates had not clearly established which laws or regulations were not inconsistent with the GeneralAgreement, and with which compliance was secured. Brazil considered that the US measures atmost enforced a policy objective, not an actual obligation as required under Article XX(d).

6.33 The Panel observed that, assuming that a system of baselines by itself were consistent withArticle III:4, the US scheme might constitute, for the purposes of Article XX(d), a law orregulation “not inconsistent” with the General Agreement. However, the Panel found thatmaintenance of discrimination between imported and domestic gasoline contrary to Article III:4under the baseline establishment methods did not “secure compliance” with the baseline system.These methods were not an enforcement mechanism. They were simply rules for determining theindividual baselines. As such, they were not the type of measures with which Article XX(d) wasconcerned.38

2. Other conditions

6.34 The Panel observed that, in view of its finding that the less favourable treatment ofimported gasoline under the baseline establishment methods accorded to importers did not “securecompliance” with the underlying baseline establishment rules, it did not need to consider alsowhether these methods were “necessary” to secure compliance and met the conditions in theintroductory clause to Article XX.

F. Article XX(g)

6.35 The Panel proceeded to examine whether the part of the Gasoline Rule found inconsistentwith Article III:4 could, as argued by the United States, be justified under paragraph (g) ofArticle XX. The relevant parts of Article XX were as follows:


38"European Economic Community - Regulation on Imports of Parts and Components", BISD 37S/132, paras. 5.12 - 5.18 (adopted

on 16 May 1990).

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(g) relating to the conservation of exhaustible natural resources if suchmeasures are made effective in conjunction with restrictions on domesticproduction or consumption;

The Panel noted that as the party invoking an exception the United States bore the burden of proofin demonstrating that the inconsistent measures came within its scope. The Panel observed thatthe United States therefore had to demonstrate the following elements:

(1) that the policy in respect of the measures for which the provision was invoked fellwithin the range of polices related to the conservation of exhaustible naturalresources;

(2) that the measures for which the exception was being invoked - that is theparticular trade measures inconsistent with the General Agreement - were relatedto the conservation of exhaustible natural resources;

(3) that the measures for which the exception was being invoked were made effectivein conjunction with restrictions on domestic production or consumption; and


In order to justify the application of Article XX(g), all the above elements had to be satisfied.

1. Policy goal of conserving an exhaustible natural resource

6.36 The Panel noted the US argument that clean air was an exhaustible resource within themeaning of Article XX(g), since it could be exhausted by pollutants such as those emitted throughthe consumption of gasoline. Lakes, streams, parks, crops and forests were also natural resourcesthat could be exhausted by air pollution. Measures to control air pollution were thereforemeasures to conserve exhaustible natural resources. Venezuela disagreed, considering that air wasnot an exhaustible natural resource within the meaning of Article XX(g); rather, its “condition”changed depending on its cleanliness. Article XX(g) was originally intended to cover exports ofexhaustible goods such as petroleum and coal; to expand it to cover “conditions” of renewableresources was not justified.

6.37 The Panel then examined whether clean air could be considered an exhaustible naturalresource. In the view of the Panel, clean air was a resource (it had value) and it was natural. Itcould be depleted. The fact that the depleted resource was defined with respect to its qualities wasnot, for the Panel, decisive. Likewise, the fact that a resource was renewable could not be anobjection. A past panel had accepted that renewable stocks of salmon could constitute anexhaustible natural resource.39 Accordingly, the Panel found that a policy to reduce the depletionof clean air was a policy to conserve a natural resource within the meaning of Article XX(g).

39"Canada - Measures Affecting Exports of Unprocessed Herring and Salmon", BISD 35S/98, para 4.4 (adopted on 22 March 1988).

See also the same conclusion with respect to dolphins in the Report of the Panel on "United States - Restrictions on Imports of Tuna", circulated

on 16 June 1994, DS29/R, para 5.13, not adopted.

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2. Measures “related to” the conservation of an exhaustible naturalresource; and made effective “in conjunction” with restrictions ondomestic production or consumption

6.38 The Panel proceeded to examine whether the baseline establishment methods foundinconsistent with Article III:4 were “related to” the conservation of clean air. Venezuela arguedthat past panels had interpreted “related to” to mean “primarily aimed at” the conservation of theresource. According to Venezuela, loopholes in the establishment of the baseline undermined itsown conservation objectives, and the measure could not therefore be seen as “primarily aimed” atconservation.

6.39 The Panel noted that the words “related to” did not in isolation provide precise guidanceas to the required link between the measures and the conservation objective. However, the Panelagreed with the interpretation of this term in the report of the 1987 Herring and Salmon case,where the panel stated that

as the preamble of Article XX indicates, the purpose of including Article XX:(g)in the General Agreement was not to widen the scope for measures serving tradepolicy purposes but merely to ensure that the commitments under the GeneralAgreement do not hinder the pursuit of policies aimed at the conservation ofexhaustive natural resources. The Panel concluded for these reasons that, while atrade measure did not have to be necessary or essential to the conservation of anexhaustible natural resource, it had to be primarily aimed at the conservation of anexhaustible natural resource to be considered as "relating to" conservation withinthe meaning of Article XX:(g).40 (emphasis added)

For the same reasons, the Herring and Salmon panel decided that

the terms "in conjunction with" in Article XX:(g) had to be interpreted in a waythat ensures that the scope of possible actions under that provision corresponds tothe purpose for which it was included in the General Agreement. A trade measurecould therefore in the view of the Panel only be considered to be made effective"in conjunction with" production restrictions if it was primarily aimed at renderingeffective these restrictions.41 (emphasis added)

6.40 The Panel then proceeded to examine whether the baseline establishment methods could besaid to be "primarily aimed at" achieving the conservation objectives of the Gasoline Rule. ThePanel recalled the purpose of Article XX:(g), which had been expressed by the panel in the 1987Herring and Salmon case as follows:

[T]he purpose of including Article XX:(g) in the General Agreement was not to widen thescope of measures serving trade policy purposes but merely to ensure that thecommitments under the General Agreement do not hinder the pursuit of policies aimed atthe conservation of exhaustible natural resources.

The Panel then considered whether the precise aspects of the Gasoline Rule that it had found toviolate Article III -- the less favourable baseline establishments methods that adversely affected theconditions of competition for imported gasoline -- were primarily aimed at the conservation of

40"Canada - Measures Affecting Exports of Unprocessed Herring and Salmon", BISD 35S/98, para 4.6 (adopted on 22 March 1988).

41Ibidem.

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natural resources. The Panel saw no direct connection between less favourable treatment ofimported gasoline that was chemically identical to domestic gasoline, and the US objective ofimproving air quality in the United States. Indeed, in the view of the Panel, being consistent withthe obligation to provide no less favourable treatment would not prevent the attainment of thedesired level of conservation of natural resources under the Gasoline Rule. Accordingly, it couldnot be said that the baseline establishment methods that afforded less favourable treatment toimported gasoline were primarily aimed at the conservation of natural resources. In the Panel'sview, the above-noted lack of connection was underscored by the fact that affording treatment ofimported gasoline consistent with its Article III:4 obligations would not in any way hinder theUnited States in its pursuit of its conservation policies under the Gasoline Rule. Indeed, theUnited States remained free to regulate in order to obtain whatever air quality it wished. ThePanel therefore concluded that the less favourable baseline establishments methods at issue in thiscase were not primarily aimed at the conservation of natural resources.

6.41 With respect to whether the baseline establishment methods could be said to be primarilyaimed at "rendering effective restrictions on domestic production or consumption", the Panelnoted that it had not determined that the measures at issue were “restrictions”, and whether theywere “on” domestic production or consumption. However, in light of its finding in paragraph6.40, the Panel did not proceed to determine this issue or whether the measure met the conditionsin the introductory clause of Article XX.

G. Article XXIII:1(b)

6.42 The Panel then noted the claim by Venezuela under Article XXIII:1(b) that benefitsaccruing to it under the General Agreement had been nullified and impaired by the application ofthe Gasoline Rule, whether or not it conflicted with provisions of the General Agreement. Inview of the finding by the Panel that the Gasoline Rule violated Article III:4 of the GeneralAgreement, and could not be justified under Article XX (b), (d) and (g), the Panel concluded thatit was not necessary to examine this additional claim.

H. Applicability of the Agreement on Technical Barriers to Trade

6.43 In view of its findings under the General Agreement, the Panel concluded that it was notnecessary to decide on issues raised under the TBT Agreement.

VII. CONCLUDING REMARKS

7.1 In concluding, the Panel wished to underline that it was not its task to examine generallythe desirability or necessity of the environmental objectives of the Clean Air Act or the GasolineRule. Its examination was confined to those aspects of the Gasoline Rule that had been raised bythe complainants under specific provisions of the General Agreement. Under the GeneralAgreement, WTO Members were free to set their own environmental objectives, but they werebound to implement these objectives through measures consistent with its provisions, notably thoseon the relative treatment of domestic and imported products.

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VIII. CONCLUSIONS

8.1 In the light of the findings above, the Panel concluded that the baseline establishmentmethods contained in Part 80 of Title 40 of the Code of Federal Regulations are not consistentwith Article III:4 of the General Agreement, and cannot be justified under paragraphs (b), (d) and(g) of Article XX of the General Agreement.

8.2 The Panel recommends that the Dispute Settlement Body request the United States to bringthis part of the Gasoline Rule into conformity with its obligations under the General Agreement.

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